Does an Education Loan Affect your Credit Score?
A good education is necessary for all; it is the foundation for building a successful career and living a fulfilling life. But today, quality education has become expensive and unaffordable for many. In such a situation, applying for an education loan is an effective solution to get the funds needed to pursue higher education.
Whether you want to study in India or overseas, today, you can easily find many lenders willing to extend education loans to eligible applicants. Speaking of eligibility for education loans, financial organisations have specific requirements and terms and conditions for extending education loans. One such critical requirement is a good credit history and credit score of the applicant or the applicant’s guardians.
In this guide, we discuss how much does student loans affect your credit score. But first, let us understand about credit scores and credit reports for student loans.
What is a credit score?
A credit score is a three-digit number ranging from 300 to 900, and it is an indicator of your or your parents’ creditworthiness. In India, many credit bureaus assign credit scores to individuals based on the financial information they obtain from banks and other financial organisations.
The lending organisation considers the credit score to assess your ability to repay the amount and determine your eligibility accordingly. The higher your credit score is and the closer it is to 900, the better your chance of getting the education loan approved faster. Although the minimum credit score required for education loans may vary from one lender to another, generally, lenders consider a credit score of 750 or more as an ideal score.
Does an education loan affect your credit score?
If you are applying for a student loan, you may find yourself asking, does taking loan affect credit score? The answer is YES. This is because you essentially take on debt when you avail yourself of a student loan. All debt products have an impact on the credit score.
Like other kinds of loans, like a personal loan, home loan or auto loan, if you miss any EMIs (equated monthly instalments) of your education loan on time or delay the payment even by a single day, your credit score may dip. Also, the education loan amount you avail, among other factors, may depend on your credit score when applying for the loan.
So, it is advisable you check your credit score before submitting the loan application and choose the right lender accordingly so that you avoid the risk of loan rejection due to a low credit score.
Positive effects of student loans on credit scores
• Repaying the loan on time may boost your credit
An education or student loan could well be your first-time exposure to credit. And, unlike other loans, educational loans come with a moratorium period, i.e., the repayment period does not start immediately after the loan is disbursed. Instead, the repayment period begins after you complete your education or get a job, depending on the agreed terms and conditions.
However, during this period, you may still have to pay the interest amount. And if you are wondering how to maintain a good credit score while nursing an education loan, make sure that you start paying the regular EMI on time. And, as you continue making on-time payments and overtime, your credit score will improve.
• Create a good credit mix
A good credit mix means having different types of credit in your portfolio; it includes secured loans like home loans and unsecured loans like personal loans. Education loans can be secured or unsecured based on agreed-upon terms and conditions.
• Helps you build a good and long credit history
Speaking of student loans and credit scores, you cannot overlook their importance in helping you build a good and long credit history. Generally, education loan repayment tenure varies from 5 to 10 years. Also, repaying the loan on time throughout the tenure will help build a strong credit history. Additionally, having a long credit history helps boost your credit score.
Can a student loan affect your credit score in a negative way?
• Defaulting on your education can lower your credit score
If you fail to repay the education loan on time or delay the monthly payments, your credit score may take a dip and have a red remark on your credit history.
• Lower credit score of your co-borrower
A lot of students generally borrow an education loan jointly with parents, siblings or spouses as co-borrowers. Since students have no income of their own, the loan is extended based on the credit score and credit history of the co-borrower.
And when you default on your education loan, it will affect the credit score of the co-borrower, too.
Conclusion
As you avail yourself of a student loan or an education to pursue higher studies and set a good foundation for building a bright future, you must always be responsible with the credit you take and ensure that you repay the amount on time. This will help you build a good credit history and maintain a high credit score.
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