This is an article by Gerri Detweiler. For the past twenty years, Gerri has been an advocate helping consumers find reliable answers to their credit questions.

Just as student loans can be “good debt” or “bad debt” depending on how they are used, they can be good or bad for your credit scores, depending on how you handle them. Obviously, they can help your credit scores when you’re able to pay them on time, and hurt them when you can’t. But there are important nuances that can make the difference between earning a great score and a mediocre one.

When student loans = good credit

A student loan can provide a student’s first credit reference. That’s especially true now that the Credit CARD Act makes it more difficult to load up on credit cards before you turn 21. Student loans differ from credit cards in an important way, though; they are installment loans, not revolving loans like credit cards. That’s a plus when it comes to building a well-rounded credit file. “Our research has shown that (all things being equal) consumers with a wider range of credit experiences tend to be better credit risks than those with only limited credit experience,” says Anthony Sprauve, public relations director for FICO.

What about the fact that many students graduate with not one, but many, student loans? Unlike maxing out a bunch of credit cards, the fact that your report lists multiple student loans is not necessarily harmful. That’s true even if the balances are high. “While having many revolving type accounts with high balances can hurt your score — even when paid on time — the FICO scoring formula doesn’t place nearly as much importance on the debt amount and the number of loans when considering installment loans,” says Sprauve.

But, of course, it can be hard to keep track of due dates on multiple loans, so the greater the number of loans, the greater your risk that you’ll miss a payment. If you consolidate some or all of your loans it will be easier to keep track of your due dates, but don’t expect a boost to your credit scores. “Typically (consolidation) wouldn’t have a major impact on the score because it’s installment credit and the amount you owe is still the same,” says credit scoring expert Tom Quinn.

When student loans = bad credit

Missing payments on your student loans hurts your credit scores. If you pay a few days late, say on the 5th of the month when the loan is due on the 1st, it’s unlikely the loan will be reported as late. But once a payment is thirty days late, it will likely be reported to the credit reporting agencies, and your scores will suffer as a result.

If you can’t make your payments, check out flexible repayment options, such as the Income Based Repayment Program (now dubbed “Pay As You Earn” by President Obama), graduated repayment, or income-contingent repayment. Or find out if you are eligible to put your loans in deferment or forbearance. Repaying your loans through one of these programs is not likely to hurt your scores, says Quinn.

But be careful. Some students who apply for deferment or forbearance think it’s a done deal and stop paying, only to discover it was not finalized and they are considered delinquent on their loans. Make sure you have something in writing from your lender before you reduce or stop making payments.

Quinn also warns about a common misconception that loans in deferment or forbearance are ignored when credit scores are calculated. “It’s still considered because you are obligated to pay it,” he says, adding that, “Delinquencies are reported even if the loan is deferred.”

What if damage has already been done? Late payments can stay on your credit reports for up to seven years and simply paying the past due amount won’t remove those late payments. But if your federal loan goes into default, you may be able to improve your credit by rehabilitating your student loan. You’ll have to make nine monthly payments on time over a nine to ten month period, depending on your type of loan. Once you do, you can apply for rehabilitation and, if successful, the notation that your loan was in default will be removed from your credit reports.

More student loan and credit scores tips

• Feel free to prepay. Pay off your student loans early and you’ll save money on interest. Doing so shouldn’t hurt your credit scores, though, Sprauve warns that without other installment loans you could see your scores drop slightly.
• Keep meticulous records. From the time you take out your first student loan, you should start a file and keep copies of loan documents, statements, etc. This documentation may prove to be invaluable if you experience payment problems.
• Pay on time. This can’t be emphasized enough. If you move, notify your lenders of your new address. A statement that goes missing does not let you off the hook for a payment. Never heard from a lender about a loan you took out? Track down the lender and find out when payments are due.

Photo: a_mina
Department of Education

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CoreLogic, a company that already works with lenders to consolidate credit reports from the three reporting bureaus, is developing a new credit report and score. The company believes its information, culled from public sources and proprietary databases, could give lenders, employers, and any other company that wants to evaluate an individual’s risk, a more accurate picture of that individual. This new credit report will go far beyond reports from Equifax, TransUnion, and Experian.

In addition to the traditional information already available on typical credit reports, the new CoreLogic “CoreScore” report includes:

• Rent payment history, with missed payments being negative.
• Payday loan applications and payment history.
• Evictions, with any record being negative.
• Child support or other court judgments, with any record being negative.
• Property lax liens.
• The value of real estate property owned.
• Home ownership fee payment history.

CoreLogic claims that it can receive new information about a transaction or inquiry within 23 days, two months faster than the other credit bureaus. The company’s databases already have 1 billion consumer transaction records covering 99.9 percent of the United States population.

Like the credit reports from Experian, Equifax, and TransUnion, most information on the CoreLogic report will remain for seven years.

How to obtain a copy of the report

The new report is already available to lenders, but it won’t be available for free through AnnualCreditReport.com for another year, and the score calculation will not be available until March, after CoreLogic works with FICO to develop the formula. Consumers will be able to challenge any item on the report that is inaccurate, and considering the source for some information is publicly available information, I expect a high rate of inaccuracy.

Until the new report is available online, you’ll need to order the report directly if you’d like to review the information for any errors to dispute.

To order a CoreLogic “CoreScore” report, call 877-532-8778 or mail CoreLogic Credco, LLC, P.O. Box 509124, San Diego, CA 92150. You’ll need to include proof of your identity, proof of your address, your first, middle, and last name, Social Security number, current and previous addresses, and date of birth.

The effect of this new report on consumers

As a result of this new report, individuals who currently have a clean credit report but owe more on their home than its market value, even if they pay their mortgage on time every month, could now have this information provided to prospective lenders who will likely interpret this as negative. People who were not considered a risk without the CoreLogic report could now be unable to qualify for the best mortgage interest rates.

Having more information and a potential for a wider variety of blemishes, lenders will be more inclined to offer higher interest rates on loans or deny credit entirely. As these records focus on problems that affect poor individuals, like evictions, payday loans, and child support, it reduces even further access to credit for society’s neediest.

There’s also a possibility for marks to remain on the report that could be interpreted as negative despite legitimate circumstances. Renters have rights, and in some cases, can refuse to pay rent due to actions by the landlord. Nevertheless, lenders will likely see missed rent payments as a sign of risk. Since the missed payments are not inaccurate, the information can’t be disputed. You may be able to attach a comment to the report, but the new score that will be calculated based on the information will likely be affected negatively regardless of the comment.

What do you think of the new CoreLogic credit report and score? Is it a further invasion of consumer privacy or a better way for lenders to assess consumer risk?

New York Times, CoreLogic [pdf]

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