How a Deferred Student Loan Can Affect Your FICO Score
A deferred student loan can ease the expense of your debts in the short run. However, failing to pay off a loan as quickly as possible will leave you with more debt in the long run. The longer the debt stays on your record without being paid off, the more it will negatively affect your credit score. Deferment may also be tracked on your score, allowing future potential lenders to discriminate against you because you had to defer previous debts.
Total Debt and Your Credit Score
Each active debt you have at any given time is listed on your credit report. A sum of all of these debts is compared to three things. First, it is compared to your available credit. For example, you may have credit lines and credit cards with high limits. It is best if your debt is lower than your available credit at any point in time, but this may not be possible in all situations. Your debt is also compared to your income. As a student or recent graduate, you are unlikely to have a favorable debt-to-income ratio. Finally, your debt is compared to your assets. If you do not own a home or car, then you will likely have a debt balance higher than your asset balance. Deferring a loan allows your total debt to remain constant or even grow due to interest rates. This throws off your balances even more, creating a lower FICO score and worse credit report.
Long Debts and Your Credit Score
The longer a debt stays on your record, the less favorable it will be for your score. Paying off a loan quickly can show you have financial stability to meet debt obligations in the short term. Electing longer term loans can already be less favorable. In a deferment situation, you are taking this one step further. You will ultimately fail to pay off a loan on the schedule you had previously arranged or agreed to. Even though the lender approved this delay, your credit score will suffer from the loan extension. While this is preferable to a default, you cannot escape penalty by extending your loan terms through deferment.
Deferment and Your Credit History
Whenever a lender looks at your credit score to determine your loan terms, the lender is looking at more than just your FICO number. The lender will look at a history of your debts, including when you paid them off and if they were satisfactorily paid. Your deferment will be noted on your credit history. Lenders will see this and wonder why you had to defer. You may heed this problem off by submitting a statement regarding the terms of your deferment, such as a simultaneous job deferment, which is common in a recessed job market. You cannot, however, prevent a lender from seeing the fact that you deferred a previous loan and wondering if you will defer this loan as well. Deferred loans cost lenders money, and they would prefer to work with a person who has paid all loans on schedule.