When you default on a student loan payment, your credit score takes a serious hit.
Chances are, the default is going to make it harder for you to qualify for loans, credit cards, and a mortgage in the future.
The good news is you can start repairing the damage right way. There are a few strategies you can use to rebuild credit after student loan default.
Defaulting on your student loan payments hurts your credit in a couple ways.
First, the credit rating agencies count missed student loan payments the same as missed payments on your credit card and other loans.
Missing just one payment can drop your credit score by about 100 points.
Every payment you miss going forward will continue to hurt your score so the sooner you can get back on track paying your loans, the better.
A record of the missed student loan payments will also stay on your credit report for seven years.
Expect that you might have to explain what happened to lenders when you apply for a loan someday in the future.
Approved deferments and forbearances won’t cause problems
These credit problems only happen when you don’t make your payments because of an unexcused default on your end.
You won’t have any credit problems for not making payments because of an approved deferment.
Some ways to qualify for deferments are if you are unemployed, have returned back to school, or enrolled in the military.
Missing payments because of a forbearance is also OK.
This is when the lender agrees to postpone your payment because of a problem in your life like poor health or not enough income to make the loan payments.
Since the missed payments in these situations are approved by the lender, the credit rating agencies still score everything like you are following your loan terms.
1. Make future student loan payments on time
If you’ve defaulted on student loan payments, the damage is done to your credit score. Now, you need to roll up your sleeves and get to work on fixing things.
The most immediate way to improve your credit score is to make all your future student loan payments on schedule.
Every on-time payment increases your credit score by a little and re-establishes your credibility as a borrower. By not missing any future payments, you’ll also avoid the damage to your credit from additional defaults.
2. Pay down other debts
Another way to rebuild credit after student loan default is to pay off your other debts besides student loans, especially your credit cards.
Thirty percent of your credit score comes down to your credit utilization rate.
This is the amount of credit card debt you have versus your total credit limit. When your cards are close to maxed out, it hurts your score.
If you pay down your balances and lower your utilization rate, your score will go up.
Paying off your other loans also helps your credit situation. When you apply for a mortgage or new car loan, lenders look at how much you already have in debt.
If you have a high amount of debt, you look like a risky applicant. On the other hand, if you’re relatively debt-free, you have a better chance of qualifying, even if your credit score isn’t perfect.
3. Take out a joint credit card or loan
If you don’t have a credit card or loans besides your student loans, you could improve your credit score by opening another account and making the payments on time.
However, defaulting on your student loans may have dragged down your score to the point where you won’t be able to qualify for a loan or credit card on your own.
Is there a family member or close friend who’s willing to help with your situation?
If they have a better credit score, they can co-sign a loan or credit card with you.
This will help you qualify and making the payments on this new account will increase your score while building positive credit history.
Just be sure you can make the payments in a timely manner because missed payments will hurt the co-signer’s credit score as well as your own.
4. Take out a secured credit card
Another way to build credit is with a secured credit card. These work like credit cards except you need to make a deposit with the company that backs up your line of credit.
For example, depositing $500 means you’ll be able to spend up to $500 on your card. Every month, you’re supposed to pay off your purchases like a credit card and if you don’t, you’ll eventually forfeit the deposit.
Making your monthly payments on a secured credit card builds your credit score just like a regular credit card.
Unfortunately, these accounts typically charge high fees and don’t offer bonuses, but they’re better than nothing while you’re trying to rebuild credit after a student loan default.
Don’t let your credit troubles discourage you.
With a little planning and some hard work, you’ll be able to repair the damage from defaulting on your student loans and will soon get back to the credit score you deserve.