Q&A: How to raise credit score after student loan is rehabilitated

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I defaulted on my large student loans in 2011. Then I rehabilitated. Over the past years I have gone back to school and my loans are currently up-to-date, but I have been on deferment and forbearances and now I am about to start paying. Since it will be seven years next year from default, will this help my credit score a lot? It is keeping my score terrible despite good behavior since I have gotten on my feet. – Rachel

Answer

Dear Rachel,
Yes, starting to delete those student loans will help your credit score to rise, so prepare to cut the checks!

Credit scores are developed from the activity that appears on consumer credit reports. FICO and VantageScores are the two most common scoring systems, and payment history is the most important factor for both. Therefore, if you send the sum required by the lender by the due date each month, you will begin to build a positive payment pattern. As time passes, your credit scores will rise.

The second weightiest credit-scoring factor is the amount of debt you’re carrying. In the industry, they use a fancy term for it – credit utilization. But the concept is simple: To ensure a high score, your balances should be low. However, loans and credit cards are calculated into these credit scores differently. Loans, no matter what they’re for, do not carry as much scoring weight as credit cards, but it is still a financial obligation and less is best.

It isn’t immediately clear why you may currently have a poor credit score. The delinquencies that resulted in the defaulted student loan should be purged from your credit reports by now, since late payments can only show up for seven years. What is on – or not on – your reports is the problem. If you have other credit products for which you’ve paid late, accounts in collections or any credit card balances you have that are more than 30 percent of your credit limits, those could be reasons why your scores are lower. If that is the case, you’ll need to resume on-time payments, satisfy bad debts and drive down balances.

On the other hand, if all you have on your reports are these student loans, then you don’t have enough positive data being reported to the credit bureaus. Credit mix is a credit scoring factor, meaning the more types of credit products you have reporting to the credit bureaus, the better. Getting a credit card and using it advantageously will help. Secured cards are perfect for people who want to establish or repair their credit ratings, so you may want to concentrate on those types of cards.

How to choose the secured card that is right for you? Look at the secured cards currently available and apply for the one you like. As long as you have a job and a cash deposit, you should qualify. Just be aware that the credit limits on secured cards are usually low, so make sure to charge small amounts and then pay the balance in full and always on time.

After six months to a year of successfully managing a secured card, you should see your credit scores rise. Once you hit the 700 mark, you may want to consider applying for a regular, unsecured card. You can monitor your credit reports and scores for free on CreditCards.com.

Finally, if you haven’t yet been congratulated on attempting something tough and then succeeding, let me be the first. Plenty of people default on their student loans, but not everyone does what it takes to rehabilitate them. The process is often hard. As you now know, it requires a significant amount of communication with the company that owns the loan – which is frequently a collection agency – reaching an agreement about how much you need to send each month and then making at least nine on-time payments.

Once all this is done, the default notation is removed from your credit reports, and the loan is considered in good standing. You’re then eligible for deferments and forbearances, which are formal payment suspensions that do not harm to your credit scores.

So kudos to you for taking the initiative and following through. Now it’s time to get the rest of your credit history in great shape!

See related: How to build credit with a student loan, FICO’s 5 factors: The components of a credit score

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Updated: 11-17-2017