There are so many factors which can impact your credit rating, it's hard to keep up with them all. Just as not being able to keep up with credit card payments and defaulting on a loan lowers your credit score, making payments on time and paying off your car will make your score go up. How can your education impact your credit score? Well, it actually can and cannot. In and of itself, it can't. Let me explain.
How Education Doesn't Affect Your Credit Score
That your education level can affect your credit rating is actually a myth. In fact, your level of education isn't even called into account on your credit report, nor does it have any bearing whatsoever on your credit scores. Only debt-related information is available in credit reports, such as civil judgments, tax liens, bankruptcy, credit cards, and loans. How much is in your savings account, checking accounts, and other non-debt banking relationships are also not including in a credit report. As a matter of fact, under the Equal Credit Opportunity Act, the following factors are also not allowed to be used when a creditor uses a scoring system to gain your credit report: religion, national origin, marital status, gender, or race, and, just the same, your education level cannot be used either.
However, your credit rating can be affected directly by factors relating to using student loans in order to pay for your education. In addition, although credit reporting businesses don't care if you have a doctorate or didn't even finish high school, creditors may look at that differently. Your credit rating is one thing creditors look at, but they also look at your creditworthiness. Basically, this means how probable it is that you will be able, and willing, to make payments on time and payoff debt obligations in a timely manner. Creditors evaluate you on whether or not they believe you will default on your obligations, using determinants such as your credit score and repayment history.
Some creditors may also use your education indirectly to evaluate your creditworthiness, and here's how. It is referred to as income-to-debt ratio. If you ended up borrowing a lot of money in order to finish your education, you may owe a much higher amount of debt compared to your income ratio than someone who didn't have to use loans to finance their education. What this means is that you owe a high percentage of your income to debt and it can most definitely affect your creditworthiness.
If you had to take out student loans to pay for college and you owe a considerable amount of money, it can be almost impossible to even make a dent in that debt amount when you are just starting out in the job market, most likely in an low level position, making lower-pay due to only recently entering the workforce. In this case, you will likely owe a high percentage of your pay to debt, which would make it difficult for you to pay an additional loan without incident.
Nonetheless, as you began to make more money, lenders will become less concerned that you won't be able to pay back your debt as your debt/income ratio decreases and your power to earn increases. This makes you less likely to miss payments in the eyes of a creditor.
Impact of Paying/Not Paying Student Loans
Another way education can hurt credit indirectly is if you fail to pay your student loans on time and in full. This can actually influence your creditworthiness drastically. Regardless if you your credit score is high enough, creditors don't like loaning money to those who have a history of not repaying or repaying late. Obviously, lenders want to know they will get their money back, on their terms, and on time as well.
Just as well, though, paying student loans back on a timely schedule can actually increase both your creditworthiness as well as your credit rating. Potential creditors like to see that you're reliable when it comes to repaying your borrowed debt. After all, they do want to loan money; that's their job! They just want to get it paid back even more!
Work Experience and Creditworthiness
Your work experience actually does play a large determining factor in deciding your creditworthiness, particularly when applying for home loans. Lenders generally look at your work history for at least two years, as well as other factors, when requesting a mortgage. Not only do lenders want to be sure you are agreeable to paying back what's owed, but that you also have the financial responsibility to make the payments. Having a long-standing job is important to lenders because it proves you are financially responsible.
Although your education level doesn't actually determine your career opportunities or your level of pay, it is more likely that your career and financial success will increase as your education increases. As a benefit, this generally increases your creditworthiness, which will help to increase your credit score.
Written by Garrett Parker
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