How Can I Fix A Low Credit Score?

Education is one of the stepping stones to a successful career. As with the changing times, quality education has turned more and more expensive, which might be beyond the reach of a common man. To help an individual during such circumstances, we have student loans or education loans available through most banks and other specialized education finance institutions.

An education loan can be availed to pursue higher studies either in India or abroad. It can not only be availed for education in continuity but also be availed if you are getting back to studies after working for a while.

As we are approaching the season of admissions for many foreign universities, we at CreditMantri thought it would be a good opportunity for the parents and the students to learn more about how availing a student loan and its subsequent repayment end up affecting your credit score.

For the common benefit of everyone, a Credit Score is a 3 digit number in the range of 300-900 and it is an indicator of your credit behavior in the past. Banks and other financial institutions use the credit score to gauge the creditworthiness of an individual. The more creditworthy a person is, the more willing are the banks to lend to that individual as they are taking a lower risk by lending to an individual who has more chances of paying up.

As with any other loan, a student loan or an education loan can also end up affecting your credit score in more than one way. But before checking, let us go through the main features of a student loan just for the benefit of our readers.

• The minimum loan amount is Rs 1,00,000 and upper limit is set at Rs 20,00,000. However, banks and financial institutions do consider higher amounts based on relative merits of the application.
• Any graduate, post-graduate, vocational and other related courses are considered for education loans for courses in India or abroad.
• As it is often the borrower's first loan, a co-borrower (generally a parent or sibling) is required.
• Female borrowers do get some rebate on the rate of interest.
• For banks, the interest structure is based on the Marginal Cost of Funds based Lending Rate (MCLR). NBFCs have their own methods of determining the rate of interest.
• There is a moratorium period on education loan. Repayment of the loan starts one year after course completion or 6 months after the borrower gets a job, whichever is earlier. The repayment tenure after the commencement of repayment is 5- 10 years, which again varies from bank to bank.
• Interest paid on educational loans gets a rebate under Section 80E of Income Tax Act.

Additional Reading: 5 most popular education loans in India

How Does A Student Loan Affect Your Credit Score?

Any form of credit that you avail can have both positive and negative effects on your credit score depending on the way you handle your credit. It is true for a student loan as well.

What are the Positive Effects of a Student Loan on your Credit Score?

1. Paying On Time Can Build Up Your Score

Very often student loan/ education loan is one of the first exposure to loan for most of the individuals. Unlike other loans, for which you have to start repayment immediately after the disbursal of the loan, student loans come with a moratorium period during which you are exempt from repayment. Only a simple interest is charged on your loan at this time.

Once you finish the period of moratorium, it is important to start paying up the loan on time. On-time repayment is one of the factors that has high impact on your credit score. A good repayment schedule can give a good start to your credit score. If for any reason, you are unable to secure a job and it is affecting your repayment, it may be good to inform your lender and discuss about an extension of the loan term. Or you could ask your co-borrower to pitch in towards the repayments for some time.

2. Helps You Have A Better Credit Mix

Credit Mix is the proportion of secured and unsecured loans in your portfolio. A prudent borrower is expected to have a good mix of both representing that the credit was availed not only for expenditure but was used for creation of assets. A student loan can be secured or unsecured depending upon your credit score and other factors deciding the loan.

If you have already availed a credit card or a personal loan, addition of a secured borrowing like a student loan may prove beneficial for your credit mix.

3. Helps You Have A Long Credit History

Student loans can have long tenures of up to 5-10 years. If this loan is repaid in the right earnest, then it will help the borrower build a strong credit history which is one of the important factor deciding a credit score. But if you do have an opportunity to pay off the loan earlier, you may do so after weighing in the pros and cons.

What Are The Negative Effects Of A Student Loan On Your Credit Score?

As there are positive effects on your credit scores, there are bound to be negative effects too if you fail to handle the loan responsibly.

1.Defaulting On Student Loans Can Affect Your Credit Score

As you must be aware, regular repayment of credit is one of the major factors that affect your credit score. A student loan is one of the initial loans that a student avails in his lifetime. Irregular repayments or defaults will go on to make a big red mark on the credit score of the borrower. You would realize it is never nice to begin your innings with a negative or a red remark.

2. May End Up Effecting The Credit Score Of Your Co-Borrower

As the student has no means of income or creditworthiness to be verified of, the student loan is generally given on the basis of the details provided by the co-borrower (either of the Parent, Spouse or a sibling ). When you default on your loan, the credit score of the co-borrower is also put at risk and may see a drop.

3. Increase in Hard Enquiries

If your co-borrower has a not-so-good credit score, then you might not be sanctioned the loan in the first application. When you make repeated inquiries towards a loan, you end up having more and more hard inquiries which doesn't make good sense for your credit score.

End Note

As you avail a student loan for a better future and great career, do not make mistakes to spoil that career by making silly mistakes on the credit side. Always be responsible towards credit, which is the only sure shot way of having a great credit score.