If you’ve borrowed money to pay for your college education, you may wonder how student loans affect your credit score. After all, credit is an integral part of your life as a consumer. Having a good credit score will help you get approved for anything, from a credit card to a car loan to a mortgage. Depending on your score, lenders determine whether you will be approved for a loan. Find out how your credit score is calculated, how student loans can affect your score, and what you can do to improve it.
Calculating a credit score
There is a widespread misperception that there is just one type of credit score. The FICO score is probably the most famous credit score, but there are hundreds of different types of credit scoring models.
Credit scores range from 300 to 850, with 300 being considered poor and 850 excellent. Each section contributes a certain percentage to your credit score:
| 35% of overall credit score | Payment history | This accounts for the majority of your score and is dependent on you making on-time payments. Late or missed payments, such as those on your student loan, will lower your credit score. |
| 30% of overall credit score | Amounts owed | Consider this your overall balance vs. your total available credit. Lenders may think that someone utilizing a substantial portion of their available credit will have financial problems or become overextended, and as a result, you may be considered a greater risk. |
| 15% of overall credit score | Length of credit history | The longer you have a credit line open, the better your credit score will be. This is due to a number of factors, including the age of your oldest credit line, the age of your most recent credit line, and the average age of all of your credit lines, loans, and accounts. Lenders also consider how long it has been since you used specific credit lines. |
| 10% of overall credit score | New credit | When you apply for many new lines of credit in a short period of time, lenders are likely to view you as a higher risk. |
| 10% of overall credit score | Credit mix | Having a wide mix of credit accounts – student loans, credit cards, vehicle loans, etc. – can help your credit score. |
What effect do student loans have on your credit score
Similar to car loans, personal loans, and mortgages, student loans are installment loans. Payment history, length of your credit history, and credit mix play a role in your credit score. If you pay on time, you can boost your score. If you pay late or skip a payment altogether, your score may suffer.
If you skip a payment on your student loans, you’re immediately considered delinquent. Delinquency affects your credit. You remain delinquent until you pay the amount past due, or arrange for deferment or forbearance, two ways to temporarily stop making or reducing your federal student loan payments.
Most servicers of federal student loans wait 90 days before reporting a late payment to TransUnion®, Experian®, and Equifax®. It is possible, however, that you will be charged a late fee immediately after you miss a payment. The bureaus will report loans that are past due more than 30 days.
You may cross over from delinquency to default depending on the type of loan you have.
The Federal Family Education Loan Program (FFEL) or the William D. Ford Federal Direct Loan Program (WDLR) will default after 270 days or roughly nine months. The period of time until you default on a federal Perkins Loan depends on the lender.
A default on a student loan can result in wages being garnished, a collection agency getting involved, and a loss of federal aid until the debt is settled or a repayment plan has been approved.
Private student loans typically have a 120-day default period, though this may vary depending on the lender and your contract. Private loans may be subject to a statute of limitations, which determines the amount of time a lender has to collect the amount owed on a loan and varies by state. When you default on a student loan, it will be on your credit report for seven years, no matter what type it is.
Impacts that are positive
In spite of the fact that many students take out student loans before they have an established credit history, student loans can improve credit scores over time.
Payment history that is positive:
In fact, your payment history accounts for 35 percent of your FICO Score, so staying on top of your payments is crucial to building and maintaining good credit.
Credit mix that is good:
Having a student loan and a credit card is usually better than having two credit cards. Your credit mix accounts for 10 percent of your FICO score.
Credit history with a long history:
With student loans, recent graduates are able to establish a credit history that they may not have had the chance to build yet. In addition, student loans can help you lengthen your credit history, which accounts for 15 percent of your FICO score, because they usually have repayment plans that last up to 30 years.
Impacts that are negative
Student loans can lower your credit score both temporarily and over time. Some of the downsides include:
Inquiry about credit:
The majority of federal student loan borrowers do not undergo credit checks when applying for loans, but if you apply for private loans or refinancing student loans, the lender typically runs a hard inquiry on your credit report. Although FICO says each additional hard inquiry lowers your credit score by fewer than five points, this will temporarily ding your credit score.
Payment history that is negative:
If you miss a debt payment by 30 days or more for private student loans or 90 days or more for federal student loans, your lender will generally report it to the national credit bureaus. Since your payment history is the most influential factor in your FICO Score, even one missed payment can harm your score. This will remain on your credit report for seven years.
Benefits delayed:
Student loans won’t significantly impact a college student’s credit history until they start making payments after graduation, which may surprise some students. Although student loans appear on your credit report shortly after you receive them, the greatest benefits come from making timely payments, which many students don’t begin making until six months after graduation.
Monthly payments and their role
If you’re late or miss a single payment, it may not affect your credit score, depending on the loan type. If you miss a bunch of payments, your credit could suffer. You need to keep up with your payments because over one-third of your credit score is based on your payment history.
Take a look at your repayment plan to avoid being late, missing payments, or defaulting. To ensure that it fits your situation and that you are able to make the payments, choose one that is a good fit for you. You can change your repayment plan for federal loans at any time, free of charge. In order to determine which repayment plan is best for you, you need to speak to your loan servicer.
Your loan servicer should always be contacted if you are having trouble making your payments.
How student loans can help you build credit
In fact, student loans can help you boost your credit rating. But you have to keep up with your payments. Otherwise, your credit score could drop. Don’t have a lot of different types of credit? In that case, having student loans on your report could add to your mix, providing a credit boost as well.
You can definitely boost your credit score by taking out student loans as a young adult because it will increase the length of time you have had credit. The average age portion of your score could be impacted more by your student loans when you’re just starting out and don’t have many open credit lines.
Let’s say you get a student loan during your first year of college. Once you graduate, your student loan account will be part of your account for several years. In turn, this will boost your credit score. Conversely, if you take out new student debt every school year or term, your credit score might decrease.
Student loan refinancing
Upon refinancing your student loans, a lender pays off your debt and provides you with a new private student loan. This new loan may come at a lower interest rate or with a different term. A refinance could save you quite a bit of interest, lower your monthly payment amount, and lengthen your repayment term. However, you must have good credit to qualify for a refinance.
In addition to saving you money, refinancing also has its drawbacks. If you refinance your federal loans to a private one, you will not be eligible for the federal program’s income-driven repayment, loan forgiveness, or forbearance, or deferment benefits. Additionally, you cannot switch back to a federal loan from a private loan.
Refinancing your student debt might not make financial sense depending on when you borrowed the money for college.
Even making on-time payments represents an important first step in building – and maintaining – a good credit score, no matter what your circumstances are.