Will Your Student Loan Hurt or Help Your Credit Score?

Thousands of dollars in student loan debt may sound like a sure way to torpedo your credit score, but it can actually give you great credit if you play your cards right.

How a Student Loan Affects Your Credit Score

For many Canadians, a student loan is their first serious debt. How you manage that debt shows creditors how reliable you will be at paying back future loans, such as car loans or mortgages. Defaulting on your student loan tells banks you may be a high risk to lend to in the future, while proper repayment of your loan indicates you’re a good bet for future lending. But few students come out of university able to easily pay off their loan. Here are some tips on how to turn your (sometimes overwhelming) student debt into an asset.

#1 - Know how much you need to pay

If you have a government loan, the government site CanLearn.ca has a loan repayment calculator which will help you figure out monthly payments. You can also compare up to three different payment schedules at the same time.

If you have a line of credit from a bank, you will need to pay down the interest on the amount of credit you've used each month. Some banks offer a pre-authorized payment option so that a forgotten interest payment won't end up causing trouble for you. When it comes time to pay down the rest of the loan, most banks offer to work out a repayment schedule with you.

#2 - Know when you need to start paying

Federal and provincial government loans have a six-month grace period between the end of your studies and the beginning of your required payments. You can also make lump sum payments on your government loan while still in school. Since full-time students aren't charged interest on their loans while still in school, any money you pay back will directly cut down on your principal.

Canlearn.ca gives this example:

You pay back $500 on your $10,000 student loan while still in school. When you graduate, interest only accumulates on the $9,500 that hasn't been paid back. You save $400 that you would have otherwise paid in interest.

Most banks require you to start paying back a student line of credit one year after you finish school (although you must make interest payments each month while still in school). They usually allow you to pay back your line of credit during school without any penalty.

#3 - Make your student loan payments on time

Always make at least your minimum payment – and do it on time. Creditors like seeing you pay off a loan consistently rather than seeing a big payment here and there. To avoid interest building up, however, it's still a good idea to pay back as much as your budget lets you. If you have the opportunity to make a big lump sum payment along with your monthly payments, do it.

#4 - If you’re having trouble with your student loan, ask for help

Don't disappear if things go bad. Ignoring an unmanageable student debt doesn't make it go away and can lead to big credit problems for you down the road. Lenders prefer to wait for their money or get less money rather than risk you defaulting on your loan.

If you have a federal student loan, contact the National Students Loan Service Centre or your financial institution. You may be able to lower the amount of your monthly payments or increase the amount of time you have to pay back the loan. For help with your provincial student loan, contact your province's Student Financial Assistance Office.

If you are having trouble paying back a student line of credit, contact your financial institution. If you approach them in good faith, they will work with you to resolve your debt with as little damage to your credit score as possible.

#5 - Monitor your student loans until they are completely paid off

Who has time to check their credit report in the flurry of different cities and temporary addresses that follow graduation? You do, if you're smart. There are many horror stories of people who thought their student loans were paid off only to find otherwise when they applied for their next loan.

Keep all student loan correspondence together in a folder. Make copies. Have your lenders' contact information and notify them before you change addresses. When your loan is finally paid off, make sure there's a record of it in your credit report. You are entitled to a free credit report from each credit bureau each year. If you've followed these five steps, you'll find that your student debt has built you a strong credit history and improved your financial future.