Paying installment loans to get credit
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The idea that your student loans have little impact on your credit score is a common myth.
The two accounts that regularly appear on credit reports are installment credit and revolving credit. Student loans, in addition to auto loans, personal loans, and mortgages, are considered installment loans and count towards your credit score.
For this reason, it is important that you do not miss any payments. Your payment history (whether you paid on time or late) is the most important factor that determines your credit score, accounting for over a third (35%) of your FICO score calculation.
“Default on a few student loans, and you’ll see how student loans affect your scores,” financial expert John Ulzheimer, formerly of FICO and Equifax, told CNBC Select.
It is important to regularly pay off your installment loan (s) each month. It can help you build your credit and guide you on the path to building a good credit rating.
Think you have a hard time remembering to pay off your loans on the due date each month? Below, we are sharing a universal tip that many use to stay on top of this monthly financial task.
Helpful tip for paying off your student loans on time
If you have a hard time remembering to pay your student loans (or bills, really) every month, there is a simple solution: automatic payment.
In order to have good credit, you need to pay all of your bills on time, not just student loans, but also your credit cards, utilities, and medical bills. With so many different due dates to remember, payment automation can help you make sure your bills get paid on time, every time.
When you automate your student loan payment, you schedule a recurring payment that automatically withdraws the same amount from your bank account on the same day each month.
Some student loan companies encourage you to pay on time by giving you a reduction on your interest rate if you set up automatic payment.
Here’s one way your bill payments can help boost your credit score: Experian Boost ™ is a free feature that allows you to add your phone, Internet, cable, utilities (gas, electricity, water) and streaming payments like Netflix®, HBO ™ and Hulu ™ to your Experian credit report. According to its website, average users receiving a boost reported a more than 10 point increase in their FICO score.
At the end of the line
Chances are, you took a break from paying your federal student loans during the pandemic thanks to the interest charge waiver program that has been in place since the CARES law was passed in March. But now is a good time to prepare for the repayment resumption in January so you don’t risk missing a payment and hurting your score.
Those monthly student loan payments can be a drag, but by setting up automatic payment, you can practically forget about them and focus on more interesting personal finance goals, like saving for a well-deserved vacation.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.