How to build credit while paying off college debt

Although you just graduated college and got your first job, you're thinking ahead: What do I need to do before I can buy a house? How much money should I put on a down payment for a new car?

By now, you've realized that building good credit is synonymous with obtaining a decent mortgage or car loan. At the same time, you're still paying off college debt, and will continue to do so into the near future. How is that going to affect your credit score? 

"Equifax classifies student loans as installments, as opposed to revolving credit."

Make your payments on time and in full 
If you're paying your student loans on time and in full, you're already building a strong credit report. Equifax noted that your credit history accounts for 35 percent of your credit score, so all of those timely payments will reflect positively in the long run. 

In addition, Equifax classifies student loans as installments, as opposed to revolving credit (like credit card bills). This increases your credit mix, which accounts for 10 percent of your FICO score. The more diverse your credit portfolio, the better your credit score - as long as you keep up with payments. 

Should you make extra payments on your loan?
Given that you're staying on top of things, you may consider paying more than the minimum amount due each month. Even adding an extra $40 to each payment will add up over time, allowing you to:

  • Repay your college debt earlier.
  • Decrease the interest you need to pay over the life of the loan.

Bear in mind that paying extra will have little impact on your credit score, according to Equifax. This is due to the fact that, by paying off your debt earlier, you're reducing the length of your credit history. 

Get an alternative credit score
What if your college debt is the only credit you have on record? This could work against you in two ways:

  1. You won't have any credit mix.
  2. If, for whatever reason, you miss a payment, you won't have other forms of credit to reduce the impact of that discrepancy. 
Paying your credit card bills on time will benefit your credit score. Paying your credit card bills on time will benefit your credit score.

Truth be told, traditional credit scores don't provide an accurate, complete assessment of a person's creditworthiness. For this reason, many people sign up for alternative credit scores. These reports not only include all the information Equifax and the other major credit bureaus collect, but also factor in utility, rent, phone, internet and subscription payment habits. So, if you're good about paying your landlord and power bills on time, this will reflect positively in your alternative credit score. 

Take out a starter credit card 
If you haven't already, get a credit card and use it wisely. Keep in mind that neglecting to pay bills more than 30 days after they're due will negatively impact your credit score, as noted by Magnify Money. You don't have to use your credit card for large purchases. For example, you could only use it to purchase gas and groceries, and then pay the balance you accrue as a result.

Although things may be financially tight, you're on your way to building good credit. Pay attention to your budget, and take every opportunity you can to save up money. 

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