Do Student Loans Affect My Ability to Get Credit?

Posted by Jamie Mackenzie Smith in Personal Finance on 8 March 2018

For many people, a student loan is the single largest chunk of borrowing they ever take out, second only to a mortgage. With course fees alone now coming to more than £9,000 per year and then the added maintenance loan on top of it, you can easily end up borrowing £40,000 during your studies.

But how do potential lenders view this figure when you want to apply for a loan, finance or any kind of mortgage after graduating? Fear not, as student loans are handled differently to other types of borrowing.

How does a student loan look on my credit file?

Perhaps surprisingly, your student loan doesn’t appear on your credit file, regardless of whether it’s been paid off, you’re still making payments, or if you’re still studying and receiving funding (provided your course started after 1998).

For students that took out a loan prior to 1998, their repayments are handled differently, as discussed below.

Why aren’t they treated like regular loans?

The monthly amount you repay is based on your annual income (and interest rate variations) and provided you’re earning above the threshold to make payments, the money is deducted from your wages before it even makes it as far as your bank account. If you’re self-employed, the amount you need to pay is calculated by HMRC and needs to be supplied along with any National Insurance and Income Tax payments.

Non-payment of monies due to HMRC can still be subject to collections, court action or even bankruptcy, but the student loan element isn’t isolated.

As of April 2018, the minimum threshold for paying contributions to your student loans is changing, going up to £18,500 for people that took out a loan before 2012 and £25,000 for people that started in or after 2012.

Mortgage style student loans (pre- 1998)

If you’re paying off a student loan that was taken out before September 1998 it is a different story altogether. Following the sale of more than 250,000 students’ loans to the company Erudio in 2013, students from 1998 and before are required to pay a ‘mortgage-style’ loan to help repay their loan amount.

Unlike an actual mortgage, the loan itself will not appear on your credit file and nor will payments made on time. Missed payments will be reported, which can have an impact on your ability to apply for finance in the future.

How university life might affect your credit report

While it’s easy to look at the overall amount borrowed to take a degree, most of that goes straight to the university, leaving a relatively small amount to live on once accommodation and bills have been paid. For that reason a lot of people turn to credit and overdraft facilities to cope with the cost of living.

If managed properly, this can help your credit history because it will show future lenders you can handle money responsibly. If on the other hand you exceed your overdraft limits or end up missing bills, this can all have a negative impact on your report. What’s more, the negative information will remain on your credit report for six years from the date of the entry being made, which means you’ll be feeling the effects long after you’ve finished your course.

Financial associations from joint accounts

If you and your housemates open a joint bank account to pay for bills, you’re likely to create a financial association between yourself and the other people named on the account. When you have a financial link to another individual, their credit history has an influence on yours, with any negative markers on their report being taken into consideration when you apply for credit.

Even after this account has been closed, the financial association will remain on your credit report until you ask the credit reference agencies for a disassociation.

Once you do go your separate ways after graduating, it’s important to check your credit report for financial associations and take steps to remove any that are no longer applicable; you don’t want to gamble your own credit rating on the financial behaviour of people could easily lose touch with.

Lack of credit information

Because your student loan, pre-paid utility bills and, in most cases, rent payments don’t report positive payment information to credit reference agencies, it’s entirely possible to finish university without any kind of credit history.

If you’ve gone through uni without opening a credit account, this does mean you might not have any credit information on your file appearing at all, which could be an issue when it comes to applying for any kind of finance.

One way to make a big difference when first applying for credit is by making sure you’re registered to vote on the electoral register; being registered to vote shows potential lenders that you’re linked to an address, which implies a certain stability. If you’ve got no previous credit history to show, your electoral roll information could improve your chances of getting accepted for finance.

You can register to vote at your parents address while living in student residence, and you may well already be linked to that address on your credit report as a result of registering a bank account to that address.

Many highstreet lenders offer loans and credit cards specifically for the purpose of building a credit history, but you may struggle to get accepted for these loans if the information on your credit report isn’t correct, which is why it’s important to check it before applying for any form of credit.

If you haven’t already, you can try checkmyfile FREE for 30 days and then for just £14.99 a month, which you can cancel at any time. You’ll get full access to the UK’s most detailed credit report, so you can see what lenders see when they check your credit history.

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