How does the student loan postponement affect creditworthiness?

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Amid the coronavirus outbreak, millions of Americans also worry about how they will pay the bills. Recently, the federal government has taken steps to ease the pressure with a comprehensive stimulus package that provides some relief with expanded unemployment benefits, economic checks, and the ability to suspend payments on federal student loans.

The $ 2 trillion stimulus package, the President Donald Trump Signed Friday allows federal student loan borrowers to take a break from their monthly payments through September 30, 2020. Interest accruing during the suspension would also be waived.

But what does all of this mean for your creditworthiness? We have good news and bad news.

Below, CNBC selection spoke to two experts about what postponing student loan payments could do to your creditworthiness.

The difference between reprieve and forbearance

Deferment and forbearance are two ways to temporarily suspend your student loan payments. Both options protect your account from late payments. So if you’re struggling to make your minimum payments, be sure to inquire about both of them. If you don’t take these steps, you may lose your chance of income-related repayment plans and other forms of support across the board.

Under normal circumstances, these two federal loan deferral options look like this:

  • Postponement: You can qualify for this if you meet certain requirements, such as: back to school, joined the PeaceCorps or lost his full-time job. While a loan is deferred, you do not have to make any monthly payments, but the interest on your loan will still apply (with the exception of some subsidized loans). How long you can defer a loan depends on the type of deferral you are applying for, but borrowers who are deferred because of financial hardship or unemployment can only defer federal student loans for a maximum of three years.
  • Indulgence: This is a second way to defer your student loan payments and it is reserved if you are not eligible for deferment. Borrowers must be approved for a deferral by their lender or servicer, and they usually limit your deferral period to 12 months. While a loan is in default, you don’t have to make monthly payments, but interest on your loan will still accrue (regardless of the type of loan). Although you can request a deferral on your loan as many times as you want, it is not recommended. Lenders and service providers can limit how often you are approved.

How do deferral and deferral on student loans affect your creditworthiness?

Neither postponement nor deferral of your student loan will have a direct impact on your creditworthiness. But postponing your payments increases the chances of eventually missing one and accidentally losing your score. Since the Economic stimulus package for the coronavirus has passed and borrowers have been given six months with no payments, it is easy for you to forget about your payments.

Borrowers should also keep in mind that if they were late or overdue on their student loan payments prior to the forbearance or deferral, it will still result in a negative entry on their credit report.

How long does student loan debt stay on your credit report?

It depends. If you make all of your payments on time, credit doesn’t necessarily hurt your creditworthiness.

However, if you default on payments or default on your student loan, “negative account information will likely appear on your credit record for seven years from the original date the account was first reported overdue,” Bruce said McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), told CNBC Select.

Currently, if you can afford to make your monthly student loan payments, this might be a better idea so as not to prolong your debt by taking advantage of this six-month grace period. This allows you to keep track of your payments and reduce the risk of defaulting on payments.

How Can Student Loan Debt On Your Credit Report Affect Your Credit Score?

Student loans are considered to be installment loans that relate to your credit-worthiness unlike credit card debt. Sometimes carrying a student loan balance with you can actually help your “credit mix” by adding variety to the type of loan products you have. But the small positive effect it can have on your credit score is not worth deferring your loan payments.

The biggest key factor that accounts for about 35% of your score is on-time payments. This applies to all revolving and non-revolving lines of credit, including your student loans. Regardless of the size of your loan debt, you will have difficulty making your student loan payments each month, this will be reflected in your creditworthiness.

“Any delinquent account that appears on your credit report can have a noticeable and negative impact on your score,” says McClary.

Finally, high monthly student loan payments can make paying off your credit card balance difficult. As you carry a balance from month to month, yours will increase Credit utilization rate, the second largest factor in calculating your creditworthiness.

What should be paid off first: student loan debts or credit card debts?

Paying off student loan debt and credit card debt should both be priorities, but there are options to help you decide how to do it.

“There are several affordable government student loan repayment options, which makes them useful in situations where payments need to be prioritized based on the most pressing needs,” says McClary.

McClary recommends finding an affordable repayment option through your state student loan service provider or possibly refinancing if your loans are private. Then, work with a nonprofit credit advisor to keep your credit cards on track.

“That way, it’s not a choice of one over the other,” he explains.

But you should be aware that paying credit card debt can help your budget first, as credit cards usually have higher interest rates than student loans. Paying off credit card debt also lowers your credit utilization, which increases your credit score.

If you want to give priority to paying your student loans, you can transfer an existing credit card balance to an account 0% APR credit cardlike that Citi Simplicity® cardto save interest. This card in particular has no late fees and no interest at all for the first 18 months on purchases and balance transfers (after 14.74% to 24.74% variable annual percentage rate).

The best credit transfer cards are usually reserved for those with Well or excellent creditbut there are options for fair credit also.

What to do if your student loan is postponed

Before you assume that your loans will automatically be postponed or tolerated due to the coronavirus, read the economic law carefully and then ask your servicer about the new guidelines.

“I’ve been told by several service providers that students actually need to make a request forbearance rather than just assuming they’ve been accepted into an forbearance program, “financial expert John Ulzheimer, formerly at FICO and Equifax, told CNBC Select.

But every service provider is different. For example, the state student loan service provider Great Lakes announced that it will automatically grant borrowers an interest-free grace period, but only those who are (or will) be 30 days in arrears with their payments. If so, you run the risk of defaulting and defaulting on your payments before you are eligible for assistance, and it may not be worth the potential damage to your creditworthiness.

Bottom line: It is important to determine what type of help is appropriate for your particular situation and to ask detailed questions if necessary.

Information about the Citi Simplicity® Card was independently collected by CNBC and was not verified or provided by the card issuer prior to publication.

Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editorial team and have not been reviewed, approved or otherwise endorsed by third parties.

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