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How Do Student Loans Affect Your Credit Score?

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Student loans are meant to help students. While it may not be as simple as mom and dad giving their child $50 for gas for the month, the idea is not to ruin the student's life and lock them in a jail of debt and throw away the key. The idea is to provide students with money to obtain a high quality education so they can make more money and pay back what they owe. However, while intentions may be decent student loans are scary and many students fear that if they do not succeed directly out of college they may be trapped under mounds of debt that may later prevent them from having the life of which they once dreamed.

One of the major fears of students is how student loans affect credit scores. This can be broken down into 2 stages: pre-graduation and post-graduation.

Pre-graduation

You have accepted that you are taking on loans to get an education. You are focusing on getting an education and building up your resume. Your loans are not currently affecting your credit score. There is no payment history so there is nothing to show in a credit score. However, student loans will show up in your credit report. They show how much you owe and lenders are permitted to take that debt into consideration prior to deciding whether or not to loan you money.

Post-graduation

You are beginning to pay back your student loans. They are now showing up on your credit report as well as your credit score.

According to Matthew Frankel, a bank stock, personal finance and investment writer;

"A big part of your FICO credit score (30%) comes from "amounts owed". And a part of that is the balance on your loan accounts relative to their original balance. Creditors want to see that you can handle your debts and are doing a good job of paying them off. So, if your student loan payments are causing your balance to decrease each month, it should be a positive factor in your credit score."

The best way to keep from going into debt and keeping a good credit score is to pay more than is required each month so that interest builds up. In order to do this, you can multiply your loan balance by your annual interest rate and divide by 12 to see how much interest accrues in a month.

All in all, student loans aren't made to hurt you or scare you. They are made to help you get the best education possible without having to wait until you can afford it. It is important to be safe and smart in taking out and repaying student loans. However, as a young adult that should always be taken into account.

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