How a Change in Your Student Loan Provider Could Affect Your Credit Score


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Earlier this year, some federal student loan departments – like Navient, the Pennsylvania Higher Education Assistance Agency (often referred to as FedLoan), and Granite State Management & Resources – announced that they would not renew their contracts with the U.S. Department of Education. ‘Education when they expire on December 31, 2021.

The expired contracts mean that nearly 10 million borrowers will have their student loan accounts transferred to another department. In other words, affected borrowers will have to start sending payments to a new service agent when the federal student loan payments break. ends after January 31, 2022.

Those affected – who should have already been informed of the change – will have to be extra vigilant when making the first payment of their student loan since the start of the pandemic. They will need to make sure they know who their new loan department is and where to send their payments, as well as confirm that their new loan department has updated their contact details and postal details (especially if the borrower has moved during the pandemic. ). It is also important that borrowers know the due date of their monthly payments.

Lack of important information from their new loan manager could lead to a missed payment, which could impact a borrower’s credit rating. But that’s not all. There are other ways in which this move to a new service agent can impact a borrower’s credit report.

“Borrowers may see their new manager’s name appear on their credit report,” says Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. “Their credit report might also list their old service agent with a zero balance. “

Listing a borrower’s former service agent with a zero balance effectively closes that account on your credit report. Typically, when an account on your credit report is shown as closed, your credit score tends to drop slightly. According to Coleman, this is due to a reduction in the average length of your credit history since the old student loan account is now closed.

The change should not affect how much you owe, and your new loan manager’s account information will be added to your credit report shortly. Also, changes to your credit rating as a result of this change in service provider may depend on the rest of your credit report. For example, you may experience a greater drop in your credit score if you apply for a new line of credit around the same time your former loan manager’s account is closed.

“Credit reports are influenced by a number of factors,” explains Coleman. “This includes the payment history of all accounts, the amount of credit available against credit limits, the types of credit accounts and the number of new credit applications and new accounts. So it’s not just student loans. ”

The change shouldn’t have long-term negative effects on a consumer’s credit report, says Holman. However, the news still leaves a few borrowers, like Lauren Holter, writer and editor who tweeted an excerpt from an email she received from her FedLoan server, feeling a little uncomfortable.

“It worries me that something beyond my control, like changing the government service provider for my federal student loans, could impact my credit rating,” she told Select. “We already know that paying off your student loans can lower your credit score, so this is just another example of how the credit reporting system works against people who do what. they’re supposed to do. “

While Holter lives overseas and likely won’t need to use his credit report in the coming months, for most Americans in the United States, their credit rating has often been hailed as one of the most important indicators of financial health.

The number – which typically ranges from 300 to 850 if you look at the FICO score model – is a measure of a consumer’s creditworthiness. It tells lenders the likelihood that a potential borrower will repay the loan or line of credit they are applying for.

Applicants with a “good” or “excellent” credit rating (scores ranging from 671 to 799 and 800 to 850, respectively) may qualify for lower interest rates on mortgages, auto loans, personal loans, credit cards and more. And they can also benefit from longer repayment terms or higher funding amounts.

On the other hand, applicants with a “fair” or “poor” credit rating (ranging from 670 to 580 and from 579 to 300, respectively) are generally entitled to less favorable terms on the money they borrow. . This could mean higher interest rates, smaller funding amounts, and shorter repayment terms (which, in turn, would result in a higher monthly payment).

Some borrowers may see a decrease in their credit rating – which may be a slight dip or a larger double-digit change – depending on what else is going on with a borrower’s credit report. Such changes might be enough to shift some borrowers into a different range of credit scores, which (depending on the borrower and their circumstances) might make it more difficult for them to get on favorable terms when borrowing money. .

“As always, this will have the greatest impact on people who are already struggling financially,” Holter said. “Many people have not recovered from the income they lost during the pandemic, and the potential impact on their credit rating from a change in government contracts is maddening. ”

How to improve your credit score if you notice a drop

Your credit score is constantly changing, so the good news is that any drops you experience are only temporary – by taking a few simple steps you can actually see your credit score. the credit score slowly improves over time.

First, make sure you make all of your loan and other debt payments on time each month. This is the most important thing you can do to help boost your score since FICO and VantageScore, which are two of the major credit card scoring models, both consider your payment history to be the most influential factor in determining your credit card score. determine your credit score.

You can also pay attention to your credit usage rate, which is your total credit card balance divided by your total available credit. Your CUR represents approximately 30% of your credit score. So if you have a credit limit of $ 20,000 and you have a balance of $ 10,000, your usage is 50%. Experts generally recommend keeping your total credit usage below 30%, and below 10% is even better. Regular, on-time payments can help lower your balance and lower your credit utilization rate over time.

And if you’re already responsible for on-time utility and cellphone payments, you may be able to use Experian Boost to boost your credit score. It’s a free and easy way for consumers to improve their credit rating. Simply connect your bank account (s) to Experian Boost so it can identify your utility, telecom, and streaming payment history. Once you’ve verified the data and confirmed that you want it added to your Experian credit report, you’ll get an updated FICO score.

At the end of the line

Federal student loan borrowers already face a bit of a stressful time as they prepare to start making payments again after January 31, 2022. And those affected by the change in student loan service will need to be extra vigilant. to understand who their new service agent is and where they should send their payments.

Affected borrowers may notice a drop in their credit rating, depending on what else is going on with their credit report. And while it can be a bit confusing for some borrowers, they should continue to build good credit habits by making payments on time, keeping their credit balances low, and not opening too many new accounts at the same time.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.


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