How to Use Student Loans to Build Good Credit

Build good credit using your student loans

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Incredible as it may sound, student loans can do much to help you enhance your credit score and credit history. When carefully and sensibly handled, your student loans can help you qualify for your first car loan, first apartment, and even your first credit card. According to finance experts, time and consistency are the two primary factors required to build a good credit score.

Understand How Student Loans Can Affect Your Credit Score

As with any other loan, student loans are required to be repaid within a certain period of time in regular installments. Regardless of whether you have opted for private loans or federal loans, you need be careful about making your payments on time.

All of your financial transactions, including your student loan repayment plans, get recorded as part of your credit history. Regular payments will earn you a good credit score.

When you apply for a loan, the first thing a lender will do is check your credit history. Improve your credit score and give potential lenders the impression that you are a responsible and reliable person, making it easier for you to get your loan approved.

Timely payment of student loans would also enable you to qualify for a mortgage loan or credit card along with the best possible interest rates and promos. On the other hand, defaulting would derail your credit score and thus make it difficult for you to qualify for new kinds of credit.

How To Use Student Loans For Building Good Credit

  • Pay off your student loans faster by making your payments on time, every time. It is the first and most important step towards building a good credit score. Though this might sound obvious, most students often ignore this vital piece of advice and lose track of their due dates, which can negatively affect their credit score.
  • It is a good idea to sign up for auto-debit through your loan provider. Automatic deduction of payment from your bank account on the specified date is the best way to ensure that you never miss a payment.
  • If for any reason you cannot or do not want to make the payments through autopay, you must set up some kind of foolproof system to keep track of the due dates. You could for example set up reminders on your phone. This especially important if you have more than one loan from multiple providers. You think you will remember but life often gets in the way and before you know it, the due date would have slipped away and you could be overdue.
  • Income-driven repayment plans are another factor that could adversely affect your credit score if you are not careful. Income based repayment plans require you to re-certify your earnings on a yearly basis so you can hold on to the lower student loan payments. If you fail to send the papers required for re-certification, the loan payment will shoot up, putting you even further in debt, which could compromise your credit history.

If you cannot afford your loan repayments, you absolutely must contact your loan provider at the earliest to discuss available options rather than default on your payment and get a black mark on your credit score.

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