Student Debt and its Credit Affects
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Debt Repayment
The most important factor in calculating your credit score is going to be your debt repayment history. Simply put, this is how you pay off your debts and it accounts for 35% of your credit score. Because your credit score is a measurement of how you repay debt this is logically going to be looked at in the most detail.
Your debt repayment, or payment performance as it is also called, takes into account not only the payments you’ve made but also the ones you miss. Your creditors will send monthly status updates of your account to each of the 3 credit agencies. The agencies then use this information to update your credit report thus keeping it relatively current from month to month. The problem for consumers here is that creditors are usually quicker to report problems than good habits sometimes.
The 4 Factors of Payment Performance
There are four components that make up a person’s payment performance; narrative codes, the current status of your account, prior late payments and public records/collection items. The least known to consumers is narrative codes. These are quite literally the written descriptions of your account, such as line of credit or real estate mortgage which are two common narrative codes.
Narrative codes aren’t friends to consumers since they never really improve the look of your credit score, though narrative notes can have a neutral or negative impact. If the narrative codes describing your account include statements like paid charge off, charge off, redeemed repossession or a number of other codes that suggest poor standing it will reflect negatively on your score.
A number system of 1 through 9 is used to quickly label the current status of an account on a credit report. This ranking of your status reflects how you’ve been paying off your debt. The best rating is 1 with the worst rating being 9 which indicates that an account has been charged off. Anything other than a 1 is going to reflect that you are delinquent in some way on a payment.
It’s the lenders who assign the current account status numbers to the credit reporting agencies. Below is a list of the what each number represents.
1 Account being paid as agreed
2 1 to 30 days past due
3 31 to 60 days past due
4 61-90 days past due
5 Referred for Collection
6 Unused
7 Account paid by either Ch. 13 bankruptcy or non-profit financial counselor
8 Repossession
9 Account has been charged off
How Late Payments Hurt Your Payment History
Any payment that is not made on time is going to be reported as a late payment by your creditor to the credit reporting agencies. Simple as that. The prior late payments will remain on your report even after you’ve made the payment. The reason being that though it was paid it still wasn’t within the contractual time limit. The lender will change your account status to a 1, but that the account is “paid as agreed” with a prior late payment.
If you are late making another payment on that account it will show 2 prior late payments, again even if the account is in good standing. The accumulation of these late payments will add up and will continue to be reflected on your credit score for up to 7 years. That’s why it is so crucial that your student loans and credit card bills be made on time each month, every month. Many businesses now have programs where you can make automatic payments each month to ensure you won’t be late.
Hopefully you have no public records or collections on your credit report that indicate late or non-payment because this is a strong indicator of unmanageable debt. Public records include tax liens, judgments and bankruptcies and are records that are kept by courthouses. Public record vendors are hired by credit bureaus to gather and verify these records so that they can be included in your credit report.
Collections however are again reported by lenders. Collection items are noted when a lender sells an account that’s past due to a 3rd party, usually to a collection agency that specializes in consumer debt collection. Both collection items and public records are going to have a significantly negative impact on your score.
Keeping Your Credit History Clean
All of this is extremely important to your future finances as well as that of your family. Beyond of obvious problem debt creates of tightening your wallet, a lower credit score can very easily keep you from getting other loans, such as additional student loans or home loans, and it will also mean paying more in interest when you do get a loan. This additional interest can end up costing you thousands more far down the road.
Because of these problems once you fall into debt it can be difficult to climb back out. One reason being your account histories will remain on your credit report for 7-10 years no matter whether you correct problems or not. These guidelines can help you better manage your debt by giving you an understanding of how your debts in school affect your credit score today and tomorrow.