The Impact of Major Life Events on Your Credit and Financial Future

Introduction

Life is full of ups and downs, with lots of important events that can completely change the course of your future. We’re talking going to college, getting married (or divorced), starting a business, purchasing a home, and more. These major milestones don’t just affect your personal life — they can have a big impact on your financial life as well.

It’s important to understand the full scope of your decisions, so let’s take a closer look.

Going to College

If you’re like most people, you might need to take out student loans to help cover the costs of attending college. And one common question on the topic is, “Do student loans affect your credit score?”

It’s a good question. And the answer is that student loans do typically show up on your credit report, and they may impact your credit score — but it’s often a positive effect. 

Consistently making student loan payments can be one of the best ways to build your credit during college, especially if you have a limited credit history. Once upon a time, student credit cards were common, but these days it’s hard to get one if you’re under 21. So those student loans are one of your only chances to prove that you can consistently pay off a debt.

Federal student loans are usually placed in deferment while you’re in school, meaning you don’t need to make payments until after graduation. But the loan can still rack up interest charges during that time, so you may choose to waive the deferment and make payments anyhow. If you do that, and the payments are on time, you can graduate with a pretty solid credit history already established.

Student loans are typically considered to be “good” debt because of their low interest rates and extended repayment periods. And once you have that degree in hand, you can likely get a higher-paying job, making it easier to handle more credit in the future.

Getting Married or Divorced

After college, the next big life event is often marriage. This doesn’t impact your credit score in and of itself, because your credit history is yours and yours alone. So no matter how many times you get married or divorced, your credit score isn’t going to change just because you signed an agreement.

Having said that, relationships are complicated. So your credit and finances could be affected — for better or for worse — as an indirect result of saying “I do” (or “I don’t anymore”).

First of all, paying for that wedding itself could increase your outstanding debt, which in turn could lower your credit score until it’s paid off. Divorce can also be quite expensive, and you may find yourself relying on credit to cover legal fees and other costs.

In between those two possible events, you’ll most likely be dealing with other financial variables. And each one of them could swing the pendulum one way or the other.

Let’s say you add your spouse to your credit card accounts or get an auto loan or mortgage together. Now your finances are combined, and if one of you has a tendency to max out your cards or forget to pay, it could bring both your scores down. And if a divorce happens, you’ll need to untangle those joint accounts.

On the flip side, if your spouse is exceptional with credit and you’re an authorized user on their card, your credit score could get a nice boost by proxy.

Starting a Business

Maybe you get bit by the entrepreneurial bug and decide to start your own business. Congratulations! These are the best of times, and the worst of times — at least, they can be.

In the early stages, you may have to use your own money or credit to get your business off the ground. But once it’s established and making money, you can likely get business credit.

Taking out a small business loan can be risky because if your business runs into difficulties or isn’t profitable enough to make payments, you could lose assets or put significant strain on your personal finances. So if you’re thinking about going this route, approach it with caution after weighing the pros and cons.

Buying a Home

Having a good credit score can help you qualify for a home loan, and also dictate the terms. The higher your score, the lower your interest rate will likely be. Getting a mortgage pre-qualification can give you a general sense of how much home you can afford.

Signing a mortgage can initially cause a dip in your credit score for a few reasons. First, it’s a new credit inquiry showing on your credit report. And second, it’s a significant increase in your total debt. But over time, mortgages can have a positive effect on your score because they show stability, which helps inspire confidence in lenders.

Facing Other Major Expenses

These common life events aren’t the only ones that could affect your credit. Other major expenses that can put a strain on your finances include job loss, having children, major medical procedures, or funeral expenses for loved ones. And knowing that they may occur in the future, you can prepare by creating a better solution now.

One crucial action is making sure you have the appropriate life or accident insurance in place. The other is setting up an emergency fund to take care of whatever that insurance doesn’t cover.

Bottom Line

Your credit score will follow you around your whole life, so it’s important to think long-term. That means paying attention to the overall trends in your score rather than focusing on the short-term fluctuations. Sort of like making buy-and-hold stock market investments rather than playing the volatility as a day trader.

And similar to stocks, you never know what life is going to throw your way. But unlike the stock market, you can take control of the results when it comes to your credit journey. Managing your credit cards and loans strategically can set you up for excellent credit in the future. And all you have to do is follow the tried-and-true methods of credit-building, like paying on time and not letting debt become too big.