Do student loans affect credit scores?
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 important part of your life as a consumer.
It affects how likely you are to be approved for everything from applying for a credit card to financing a new car to getting a mortgage for your first home. Lenders use your credit score to help determine whether they’ll approve you for a loan and under what terms.
Here’s information on the formula behind your credit score, how student loans can affect your credit, and what you can do to help boost your score.
- Student loans could improve your credit score or ding it.
- It’s important to stay on top of your payments, and consider repayment options as necessary.
- Refinancing student loans could be a good option to help maintain your credit score.
How a credit score is calculated
A common misconception is that there’s only one type of credit score. Actually, there are hundreds of different types of credit scoring models, but the best-known one is probably the FICO® score.
A FICO credit score ranges from 300 to 850, with 300 considered a poor score and 850 excellent. A credit score consists of five categories or sections. Each category contributes a certain percentage to your score:
| 35%of overall credit score | Payment history | This makes up the lion’s share of your score and relies on your making on-time payments. Late or missed payments, such as for your student loan, will negatively affect your score. |
| 30%of overall credit score | Amounts owed | You can think of this as your total balance against your total available credit. Lenders may assume that anyone who’s using a large percentage of their available credit will have financial issues or become overextended, and, as a result, may consider you a higher risk. |
| 15%of overall credit score | Length of credit history | The longer you have a credit line open, the stronger your score. This is due to several factors, including the age of your oldest credit line, the age of your newest credit line, and the average age of all your credit lines, loans, and accounts. Lenders also evaluate how long it’s been since you’ve used certain credit lines. |
| 10%of overall credit score | New credit | When you apply for multiple new lines of credit within a short window of time, you’ve likely deemed a greater risk to lenders. |
| 10%of overall credit score | Credit mix | Having a diverse mix of credit accounts — student loans, credit cards, car loans, etc. — can boost your score. |
How student loans affect your credit scores
Student loans are a type of installment loan, similar to a car loan, personal loan, or mortgage. They are part of your credit report and can impact your payment history, length of your credit history, and credit mix. If you pay on time, you can help your score. Be late or skip a payment altogether, and your score may take a hit.
Being delinquent or defaulting on your student loans can negatively impact your credit. When you skip a payment, you’re immediately considered delinquent.
You remain delinquent until you pay the amount past due, or arrange for deferment or forbearance, two ways to temporarily stop making or reduce your federal student loan payments.
With federal students loans, most servicers usually wait 90 days before reporting a late payment to all three major credit bureaus — TransUnion®, Experian®, and Equifax®. However, you may be subject to a late fee immediately after missing a payment. Private lenders will report loans more than 30 days past due to the bureaus.
Whether — and when — you cross over from delinquency to default largely depends on the type of loan.
How Do Student Loans Affect Credit Scores?
For instance, loans under either the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program (FFEL) will be in default after 270 days or roughly nine months. If you have a federal Perkins Loan, the period of time until you default depends on the lender.
There are many consequences of defaulting on a student loan, including the possibility of wages being garnished, a collection agency getting involved, and no more access to federal aid until the debt has been settled or a repayment plan has been approved.
The period of default for private student loans is typically 120 days but may depend on the lender and your agreement. 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. No matter the type of student loan, when you default, it will stay on your credit report for up to seven years.
The role of monthly payments
If you’re late or miss a single payment, it may not affect your credit score, depending on the loan type. But miss a bunch of payments, and your credit could take a blow. As your payment history makes up over one-third of your credit score, you’ll want to stay on top of your payments.
To avoid being late, missing payments, or defaulting, take a look at your repayment plan. Make sure it’s one that’s a good fit for your situation, and that you can keep up with the payments.
The good news is that you can change your repayment plan for federal loans at any time, at no cost. You’ll just need to reach out to your loan servicer to discuss your repayment plan options to determine which one works best for you.
How can I find my PayPal account number?
If you are having trouble making your payments, you should always reach out to your loan servicer to find out what your options are.
How student loans can improve your credit
Student loans can indeed bolster your credit. Of course, for that to happen, you’ll have to keep up with your monthly payments. Otherwise, your score could drop.
Don’t have a lot of different types of credit? In that case, having student loans show up on your report could add to your mix, which also can provide a credit boost.
And if you take out student loans as a young adult, it can certainly increase the amount of time you have had credit, which boosts your score. When you’re just starting out and don’t have a lot of open credit lines, your student loans could carry more weight toward the average age portion of your score.
Let’s say you get a student loan during your first year of college. When you graduate, that account will have been part of your account for several years.
In turn, it could help boost the average age of your credit history. On the flip side, if you take out new student debt every term or every school year, that could lower the average age of your credit.
Refinancing your student loans
When you refinance your student loans, a lender will pay off your debt and issue a new private student loan. This new loan may come with a lower interest rate or a different term, or length of time you have to pay the loan.
Over time, it could save you quite a bit of interest. It could also lower your monthly payment amount while lengthening your repayment term. However, to qualify to refinance your student loans, you’ll need solid credit.
While refinancing can save you money, it can also pose downsides. When you refinance your federal loans to a private one, you can no longer tap any of the benefits that come with the federal program, such as income-driven repayment, loan forgiveness, or forbearance or deferment. You also can’t switch back from a private loan to a federal one.
Another thing to mull over is the age of your student debt. Depending on when you first borrowed the money for college, it might not make financial sense to try to refinance your loans.
Whatever your circumstances, you should keep in mind the impact of your credit score when assessing your student loans. Even just making on-time payments represents an important first step in the building — and maintaining — a good credit score.
Ready to start your financial future on the right foot?
Building and maintaining a good credit score starts with making smart choices when deciding how to pay for college — and we’re here to help. Learn more by calling 1-888-411-0266 to speak to a Student Lending Specialist or visit our Student Lending page — we’re on chat.
How much does a student loan affect your credit score?
Student loans on your credit report can be good or bad for your credit score. Since student loans are a type of installment credit, having them on your credit report adds to your “credit mix,” which makes up 10% of your score calculation.
Does a student loan show up on your credit report?
The straightforward answer is yes. Your student loans appear on your credit report and are factored into your credit rating, just like any other loan. How you manage your student loans can make an impact, so it’s important to stay on top of the situation.
Do student loans affect buying a house?
Student loan debt affects your debt-to-income ratio, credit score, and ability to save for a down payment. Your student loan debt affects whether you can buy a house, in both direct and indirect ways. … Missing a student loan payment can lower your credit score, but consistently paying on time can bolster it.
How can I improve my credit score with student loans?
Remember, you don’t need a perfect credit score, you just want to be in the highest possible range.
- Avoid late payments.
- Pay down revolving debt first.
- Increase your revolving credit limits.
- Get a credit card.
- Use student loans to your advantage
- Pay rent via credit card.
- Review your credit report and dispute errors.
Do student loans fall off after 7 years?
Your responsibility to pay student loans doesn’t go away after 7 years. But if it’s been more than 7.5 years since you made a payment on your student loan debt, the debt and the missed payments can be removed from your credit report. And if that happens, your credit score may go up, which is a good thing.
Does paying student loans to increase your credit score?
Student loans allow you to make positive payments: When on-time payments land on your credit history, your credit score can grow. So when you make regular payments on your student loans, your credit score could improve.
Do student loans affect credit scores?