More and more students all across the country and right here in Memphis go to college and continue to graduate with more and more loan debt. However, with few debt management solutions available, more students worry about their loan's effect on their credit card debt.
Many students are concerned that taking out student loans will have an adverse effect on their credit scores. These students will be happy to learn that student loans do not typically affect credit scores. Fair Isaac and Company determines credit ratings and has developed an algorithm to determine credit scores. The three credit agencies, Experian, TransUnion and Equifax use the algorithm to determine credit scores. Credit scores are measured on a scale from 300 to 850.
Credit scores are designed to assess the risk of lending money to a borrower. When a borrower asks for a loan, the bank will use that individual's credit score to determine whether or not that person would be a good borrower and pay back the loan on time.
A new study has found that even those students with the highest student debt still have average credit scores, although the credit scores are still lower than those without student loan debt. The student loan debt does not have a direct impact on credit scores. If a student is able to pay loan debt back on time, it will improve their credit score. Also, talking out different types of credit and paying them back on time will improve credit scores.
While student loan debt does not have a direct impact on credit scores, it is still important for students to consider all their debt management options before taking out loans. Students whose debt has become unmanageable may wish to consider filing for bankruptcy, which can eliminate credit card and other types of debt completely.
Source: US News and World Report, "Understand the Impact of Student Loans on Credit Scores," Jan. 2, 2013