Student Debt and its Credit Affects
Page 2 of 4
Type of Debt
Not all debts are weighed equally on your credit report, and the type of debt you have will contribute to roughly 10-15% of your credit score. There are secured debts, unsecured debts, revolving debt, installment debt and open debt - all of which are slightly different in nature thus hold value differently in the eyes of creditors.
Secured Debt vs. Unsecured Debt
With secured and unsecured loans the difference is simply that with a secured loan, like a home loan, the debtor puts up some sort of collateral to ‘secure’ the loan. For debts like credit cards that have no collateral involved this debt is unsecured. Of course secured debt is going to look better that unsecured debt on your credit report.
Installment Debt
Many installment debt are also secured debts. Installment debts, like student loans, are ones that have monthly fixed-rate payments over a fixed period of time whereas revolving debt, again credit cards are an example, doesn’t have a fixed amount and the monthly payments depend on how much you borrow on the line of credit. Your balance is adjusted each month and it can be paid off in part or in full. Open debt, which is the least common form of debt, involves running up a balance like revolving debt. However with open debt the balance is supposed to be paid in full each month, for example with your cell phone bill.
Some debts are also considered better than others depending on what the credit was used for. A student loan is considered good debt because the funds are going towards your education. This is most often seen as an investment therefore a positive use of the debt. For more information on good vs. bad credit please visit read our article Can a Student’s Debt be Good?
Revolving Debt
Now when weighing your score it’s the revolving debt that is scrutinized the most. That’s because unlike installment debt it’s your spending and repayment habits that will determine the balance of your revolving debt. Revolving Utilization is the term that describes the total ratio of your credit limits to your credit balances for revolving credit. This correlates directly into the amount of debt you owe which is an even more important factor as will be discussed below.
Knowing this it’s easy to see why it’s better to pay down any student credit card debt you have before a student loan. Not only will this keep your revolving utilization down and bump up your credit score, but a student loan is also considered good debt and will almost always have a lower interest rate than a credit card.