Student Loan Defaults: Be Careful Not to Make This Huge Mistake

Student Loan Defaults: Be Careful Not to Make This Huge Mistake

NEW YORK (MainStreet)—With looming student loan payments each month, borrowers may find it tempting to skip a payment or two, especially if their payoff date is being counted in years and not months.

While you might forget that you missed a payment once or twice or were late by merely a few days, your future lenders are likely to remind you of your blunder. Mistakes like this can result in serious consequences.

Even if you are late once with your student loan payment, government and private lenders such as Sallie Mae and banks will report your tardiness to credit bureaus.

Your credit score is examined by various lenders when you try to obtain debt from a credit card company or purchase a house or car. Most lenders use the FICO score to assess your credit, the amount of money you can borrow and the amount of interest you will pay.

Having a strong and high FICO score means you can receive the lowest interest rates on loans and obtain higher quality credit cards.

Student loan repayment affects your credit rating just like any other credit obligation. When you are late paying your student loan by even 30 days, the occurrence is reported to the credit bureaus and will lower your score.

Since FICO reports that payment history makes up 35% of the FICO score, it is critical to make your loan payments on time.

If you accidentally forgot to pay your student loan or missed it by a few days, it is possible the loan servicer may report it to the credit bureaus, said Dean Obenauer, assistant director of Financial Aid for Financial Literacy at Creighton University in Omaha, Neb.

"It may ding the credit score some, but then the score will go back up when on time payments continue," he said. "If it is the only late payment, it shouldn't impact the score much. However, if it is one of several accounts that are late, the impact could be more severe."

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