Every year, around 1.5 million students graduate from university with student loan debt. Moreover, the average student loan debt is estimated to be around £45,000! For many, this is the biggest debt they will ever face. However, student loans may not be as crippling as other forms of debt.
Here’s the truth about how student loans can affect your credit score.
What is a credit score?
If you ever want to take out a mortgage or borrow money, the lender will need to make sure that you can pay back what you owe. In the UK, lenders do this by checking your credit score.
A credit score is a number given to every individual who has used any kind of financial credit. A high score indicates a good level of creditworthiness whereas a low score indicates a poor ability to handle credit. Lenders typically favour higher scores, so having a low score could make it difficult to borrow money in the future.
As a result, many university graduates are concerned that their student debt may affect their credit score.
Do student loans affect your credit score?
Simply put, student loans do not affect your credit score. This is because student loans do not appear on your credit report and therefore do not contribute towards your score. Thankfully, this means that students who leave university with large debt can still have a good credit score.
However, it is worth noting that mortgage lenders could still take your loan into consideration when running an affordability check. As a result, your chances of getting onto the property ladder may be affected by a substantial student loan. Although, many mortgage lenders will still accept applicants who have student debt as long as they meet their other borrowing criteria.
If a lender wants to know the status of your student loan, they will usually ask you in person.
Borrowing money with a student loan
While student loans do not directly affect your credit rating, they can still impact your ability to borrow money. In the UK, the majority of high-level workers will have a student loan due to educational qualifications required to secure a job. As a result, it is still possible to borrow money with a student loan as long as you make your payments on time.
That said, paying off a student loan each month reduces the amount of disposable income that you have. For this reason, some lenders may be hesitant about lending to an individual who has a student loan. How much your student loan will affect your chances of borrowing money will depend on the extent to which you meet other lending criteria. All lenders are different and some may have stricter rules than others.
How to improve your credit score as a student
If you’re worried about your student loan affecting your chances of borrowing money in the future, it may be worth securing a high credit score before you graduate. Here are some tips for boosting your credit score as a student.
Avoid buy-now-pay-later schemes
Buy-now pay-later schemes are popular with university students who may be on a tight budget. However, many students don’t realise that these schemes can impact their credit scores. Therefore, if you use these schemes and make late payments or borrow more than you can afford to pay back, your credit score will decrease.
To be safe, it’s wise to avoid these schemes altogether. If you’re struggling to afford the things you need, consider creating a budget and tracking your spending to find where you could make savings.
Register to vote!
One of the easiest ways to instantly boost your credit score is to get on the electoral roll. In fact, those who haven’t registered to vote will find it harder to borrow money in the future. While registering to vote may seem like a hassle, it is a great way to increase your score and put you in a better position for future credit applications.
Use a credit card to make small purchases
If you haven’t already, you should consider applying for a credit card. Using a credit card responsibly is one of the easiest ways to build up your credit rating and prove to lenders that you are creditworthy. To do this, use your credit card for small purchases, such as coffee or groceries, and pay back what you have borrowed as soon as possible.
Every time you pay your credit card bill before accumulating any interest, you will gain points towards your score.
Check out our featured student credit cards in the UK to find one that’s right for you.