How Student Loans Affect Your Credit

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Points of Interest

Student loans can help get you the money you need for school, and when used properly, can help set you up for future financial success.

A popular question asked by students looking to fund higher education is, “Do student loans affect credit scores?” The answer is a resounding yes. How these loans affect your credit score, however, will depend on how you use your loan.

If you’re making good on all of your payments and demonstrating good borrowing habits, student loans can help your credit score increase over time. If you’re chronically late on your payments, though, or if you default, your credit score is going to be affected negatively. Current statistics show that the default rate on student loans is around 10.1%, which indicates that many people have allowed student loans to destroy their credit.

The ways student loans can affect your credit score

When it comes to the ways that student loans can affect your credit score, the list is fairly lengthy. On one side of the aisle, there are several positive ways student loans can raise your score. On the other, you’ve got the short-term and long-term ways that student loans can lower your credit score.

The best way to understand the effects is to remember what your credit score represents. Your credit score shows the likelihood that you will or will not default on a loan in the next few years. In other words, it’s an indicator of what type of borrower you are. If you are making good on your student loan payments and showing good borrower habits, your score will go up. If you’re not, your score will go down.

Late payments

A good borrower is someone who meets their payment obligations on time. If you are late on your payments, those late payments will be reported to the credit bureaus and your score will go down. According to Experian, one of the three major credit bureaus, a single late payment can stay on your credit report for up to seven years.

On the flip side of this, on-time payments showcase good borrowing behaviors. As you build a pattern of on-time payments, your credit score will go up.

Tip: If you are going to be late on a payment, contact your lender before the payment is due. Many lenders have programs and options to help you out.

Missed payments

As your credit payment history makes up 35% of your FICO credit score (the score used in over 90% of lending decisions), missing a payment over 30 days can be detrimental to your score. Many credit reports detail late payments based on how overdue they are, so if you don’t rectify the situation by making a payment, your credit score will take a harder hit by the 60 day and 90 day late marks — or eventually a default.

Defaults or collections

The absolute worst thing you can do is let your student loan go into default or be sent over to collections. Once this happens, the lender will be limited in the options it has available to help you out.

Plus, the effects on your credit score will be significant. A single default can negatively affect your score by 100 points or more, but many student loan lenders have programs to help if times have gotten tougher, so you should try not to let it get to that point. These programs may be able to help you avoid default or having the account sent to collections.

Amount of debt

The second largest element of your FICO credit score is the amounts owed at 30%. The higher this amount is, the lower your credit score is going to be. This is because someone who has a high amount of outstanding debt is generally considered riskier to lend to than someone with little or no outstanding debt.

When you take out a student loan, the amount of your debt will increase. This may cause your credit score to drop. The good news is that as you pay off your loan, the amount that’s outstanding on the loan will decrease. As it decreases, your credit score will increase.

Credit age

Another large part of your FICO credit score is the length of your credit history. This makes up 15% of your overall score. The metric looks at how long your existing accounts have been open.

Generally speaking, the longer accounts have been open, the better it will reflect on your credit score. If you have a bunch of newly opened debt, it could mean you are a riskier borrower (at least in the eyes of the scoring model). In the early stages of your student loan, this may be negative. As your account ages, it can be a positive impact on your score.

What to do if you can’t pay your student loans

No one takes out a student loan expecting not to be able to pay it back. However, sometimes life can throw curveballs and create situations where you might be struggling to stay up on your payments. Luckily, there are some options and steps you can take to prevent yourself from falling behind.

  • Contact your loan servicer. Many loan servicers and lenders have programs in place to help you out when times get tough. The worst they can tell you is no.
  • Look into refinancing. If you’re looking for lower payments, you may be able to refinance your student loans to get a lower monthly payment.
  • Change your payment plan (federal loans only). Federal student loans have multiple ways in which you can pay. Check to see if another payment option, like the income-driven repayment plan, is a better option.

Tip: If you are refinancing a federal student loan, be aware that you will lose some of the protections offered through these loans, as they will be converting to private loans.

Do student loans help build your credit?

Student loans can do wonders to help you build your credit, as long as you are using them wisely. Remember, your credit score reflects your past borrowing habits. If you are making on-time payments and living up to your financial obligations, student loans will help you to build your credit. For many new graduates, this is a great way to get started on the road to financial independence.

Do I need a good credit score to get a student loan?

If you are applying for federal student loans, you won’t need a good credit score to apply and be approved. However, if you are looking for private student loans, you are required to have a decent to good credit score. The exact score you need will be dependent on what the lender decides.

The reason is that federal student loans are backed by the government, which is willing to accept the additional risk. Private companies are for-profit and are unwilling to take on unlimited amounts of risk. Because of this, you’ll need a decent credit score or a cosigner with a good credit score to take out a private student loan.

The final word

Student loans can and will have an effect on your credit score over the short and long haul. Whether those effects are positive or negative will largely be up to you and how you choose to live up to your financial obligations. If you pay back your debts on time, your credit score will benefit. If you make late payments or default, your credit will take a hit.

Jason Lee

Personal Finance Contributor

Jason Lee is a seasoned copywriter with a passion for writing about banking, tech, personal growth, and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill set with the rest of the world.