Do student loans impact your credit score?
Getting a student loan is a reality for the majority of those going through some sort of post-secondary education. They help pay for tuition, books, living expenses, food, and all that comes with being a student. Often when you are in school, you don’t even think about your loans, they are just there to help you pay your way through. But, once you graduate and head on out into the “real world” those loans follow along with you. Not only do you have to pay them back, but they are a form of credit attached to your name. So, how do these loans that can take decades to pay back affect your credit score? Let’s have a look.
For this article we will be looking at student loans specifically in Ontario.
Different types of student loans
How your credit is affected can vary depending on the type of loan that you get to help fund your post-secondary endeavours. Some loans may be friendlier to your score than others, so it is important to understand which kind of loan you have and how it can affect your future financials.
OSAP – The Ontario Student Assistant Program, more commonly known as OSAP is the most popular form of student loan in Ontario. Because OSAP is a government program, you will not accumulate interest until after your schooling is complete, helping to keep down the repayment costs, and your credit history clean. OSAP is a first step into credit for many, so it plays a softer role in your credit history compared to other loans.
Bank line of credit – A student line of credit can be obtained through your bank. This is often the avenue of choice for those that either do not qualify, or do not get enough money from OSAP. Often with a line of credit from a bank, you would have to co-sign with a parent or guardian, as you not previously of had any form of credit to help approve such a substantial loan. Since the loan is from a bank however, you will have to pay interest while the loan is active not just when you are done school. While it is not ideal to make interest payments while in school, it works as a great way to build up your credit and create a positive credit history.
Alternative lender – Instead of going through a traditional bank, you may have gone through an alternative lender to get your loan. Because a loan from an alternative lender is not regulated by the government or a bank, it may have more of an effect on your credit score. Often loans of this nature will not be listed as a “student loan”, but rather a personal loan, not giving you the safety that a traditional student loan can give you. A loan of this nature should be used with caution and paid back in full as quickly as possible as you could face high interest rates and negative credit hits.
Grants and bursaries – If you received a grant or bursary through your school, OSAP, or another institution, you have nothing to worry about. Grand and bursaries as a gift to you as a student, usually for displaying great marks or extra-curricular activities, and you do not have to pay them back. Since you do not have to worry about paying them back, they have no effect on your credit history!
The take away
Your credit score is an important part of your financial wellbeing as it helps you to get not only future loans, but apartment, cars, sometimes even jobs. So it is important to keep it as clean as possible.
So, how does your student loan come into play? As a general rule, student loans don’t necessarily play a negative role in your credit history unless you fail to make the payments required of you. If used properly, your student loans can actually be a positive aspect of your financial portfolio as it shows you are a responsible borrower and gives you a base level of credit that those looking into your score can judge you upon.
How to combat any negative affects
To help prevent your student loans from having a negative effect on your credit score, here are some helpful tips.
Make your payments – Even if your type of student loan does not inherently affect your credit score, missing payments will. When the time comes to start paying back your loan, be sure to make your payments on time and in full. Failure to do so can lead to negative hits on your credit score, and can lead you further into debt.
Pay back ASAP – If you have the ability to, pay back more than just the minimum payments. The quicker you are able to pay off your loan, the less interest you will accumulate, and the less you will have to pay back in the long run. Paying back your loan this way is also a good indication future lenders that you are more than just fiscally responsible.
Look at your other forms of credit – Be sure to take a look at the other forms of credit in your life, and ensure that you are making full and timely payments on them as well. If there is anything there that you do not need, or you feel may negatively impact your score, pay it off as soon as possible and get rid of it.
Regularly check your credit score – Knowledge is power. Be sure to keep on top of your credit score and check it regularly. This way, if something takes a negative turn, you will know as soon as possible, and can take the steps to fix it. Checking regularly also ensure that you catch any fraudulent activity happening with any of your accounts.