Consumer IQ, Credit

More Credit Q&A From Mint.com Facebook Fans

Last week, I tackled two questions from fans of Mint.com on Facebook. This week, I’ll tackle three more.

Q1: How does having student loans really affect your credit “image” and at what point/value?

A student loan is just that… a loan. And, if that particular loan (or loans, if you’ve got several of them) is reported to the credit reporting agencies, then the same rules about how loans impact your credit scores are going to apply. The point being, you don’t get more or less “points” simply because it’s a student loan.

Student loans are installment loans, which means there is a fixed payment for a fixed period of time. Installment loans don’t have a huge impact on credit scores because they’re normally more stable than, for example, credit cards. The reason installment loans are more stable is because the downside to not paying them is more invasive than the downside to not paying credit card debt. For example, your tax returns can be affected if you don’t pay your student loans.

Having said that, student loans are a perfectly effective way to build a solid credit report. If you’re paying your debt on time month after month, then that will help you to establish good credit scores.

Q2: How do I get credit for paying my student loan that’s in my parent’s names? The lender won’t let me switch or refinance it.

Well, that is quite a conundrum. Basically, you’re paying off a loan that belongs to your parents and they’re the ones getting the value of your on-time payments.  While it might seem easy for the lender to swaps names on the promissory note, it’s never that simple.

Here’s a solution: Take out a personal loan and pay off the student loans in full. This way, you’ll become obligated to pay back the loan, which will show up on your credit reports and it gets your parents out of the equation. There are some downsides to this strategy that you should keep in mind:

First, if the aggregate amount of your student loans is too high, then you might not be able to qualify for a personal loan large enough to wipe it out. Second, you are going to lose any tax benefit because interest on personal loans is not deductible and interest on student loans normally is. Finally, the interest rate on a personal loan is probably going to be much higher than the rate on the student loans, so the debt just became more expensive.

I’d suggest that you perhaps look at other solutions for building your credit reports and scores. There are many credit card options that won’t cost you a dime, as long as you pay the balance in full each month. Opening a card is the most cost-effective way for responsible consumers to build credit.

Q3: Are my student loans going to ruin my chances for a mortgage, even with no late payments and excellent credit?

Coverage of student loans has been pretty negative over the past few years, and for good reason. We’re now in $1 trillion dollars of student loan debt, which outpaces our credit card debt. Student loan debt can’t easily be wiped out with a bankruptcy, so we’re stuck with it until we pay it… or die.

Having said that, from strictly a credit reporting and scoring perspective, there’s absolutely nothing wrong with student loans.  In fact, your student loans could be help your chances to qualify for a mortgage, especially if you’re paying them on time, which it sounds like you are.

The one thing you should keep in mind is how the debt impacts your “DTI” or debt-to-income ratio, which is the amount you’re obligated to pay relative to the amount you earn. The point being, even with solid credit scores, having too much debt of any type can disqualify you for a loan, even if you’re got fantastic credit scores.

The best thing you can do is to continue to pay your loans on time, month after month.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.