How a change in student loan provider could impact your credit score

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Earlier this year, some federal student loan managers — like Navient, the Pennsylvania Higher Education Assistance Agency (often called FedLoan), and Granite State Management & Resources — announced they would not renew their contracts with the US Department of Education when would expire on December 31, 2021.

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

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

Failure to provide important information from their new loan manager could result in an accidental missed payment, which could impact a borrower’s credit score. But that’s not all. There are other ways this move to a new servicer can impact a borrower’s credit report.

“Borrowers can see the name of their new service agent listed on their credit report,” says Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counselling. “Their credit report might also list their old repairer with a zero balance.”

Listing a borrower’s former repairer with a zero balance effectively closes that account on your credit report. Typically, when an account on your credit report is listed 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 older student loan account is now closed.

The change shouldn’t affect the amount you owe, and your new loan servicer’s account information will be added to your credit file shortly. Additionally, changes to your credit score as a result of this service change may ultimately depend on the rest of your credit report. For example, you may see a bigger drop in your credit score if you apply for a new line of credit around the same time your old loan servicer’s account closes.

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

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

In his tweet, Holter highlighted a line from the email that read, “Once your loans have been fully transferred, you may see some changes to your credit report.”

“It worries me that something that’s completely beyond my control — like the government changing the 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 cause your credit score to drop, so this is just another example of how the credit reporting system works against people who do what they do. they’re supposed to do.”

The communication Holter received from FedLoan gives the impression that his credit rating could be affected, but the executive director of the Student Loan Servicing Alliance, a trade association responsible for managing these loan transfers, contacted Select after the publication of this story to state that the Department of Education has given advice to repairers on how to perform the updates so that they do not affect credit scores. He further explained that federal loan account transfers will only result in a service name change on borrowers’ credit reports and not a closed account.

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 score 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 request.

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

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

Some borrowers may see a decrease in their credit score – which can be a slight drop or a bigger double-digit change – depending on what else is going on in the borrower’s credit report. Such changes could be enough to move some borrowers into a different credit score range, which (depending on the borrower and their circumstances) could make it harder for them to approve 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 a potential impact on their credit score due to 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 rating slowly improves over time.

First, make sure you make all your loan payments and other debts on time each month. This is the most important thing you can do to increase 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 when determination of your credit score.

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

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

At the end of the line

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

Affected borrowers may notice a drop in their credit scores, depending on what else is going on in their credit report. And while it may be a little disconcerting for some borrowers, they should continue to practice good credit habits by making payments on time, keeping their credit balances low, and not opening too many new accounts at once.

Editor’s Note: This article has been updated with additional information provided to Select after the original story was published.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.

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