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Do Student Loans Affect Credit Score

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like Banks.com, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated December 18, 2023​

6 min. read​

If you have student loans, you may wonder how they affect your credit score. Is the impact more positive than negative? Or do student loans do more harm than good? If it’s the latter, are there ways to minimize the negative impact? Read on to learn the answers to these questions and more. You’ll also discover a platform that makes it easier to keep tabs on your credit score and identify ways to improve your overall credit health

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Student Loans in the U.S.

Student loans are categorized as federal or private in the U.S. Here’s a closer look at how each works: 

  • Federal student loans: These loans are funded by the government and typically have lower interest rates than private loans. They also offer more flexible repayment options and, in some cases, forgiveness programs. As a borrower, you generally don’t require a cosigner, and your credit history might not affect your eligibility or interest rate.
  • Private student loans: They are offered by banks, credit unions, and other financial institutions. The interest rates, fees, and terms for these loans can vary widely depending on the lender. Private loans often require a cosigner, particularly if the borrower has limited credit history. Your credit score plays a significant role in determining your eligibility and interest rate for private loans.

Both types of loans can impact your credit score since they are reported to the three major credit bureaus – Experian, TransUnion and Equifax. 

Your Credit Score At-a-Glance

Before exploring the impact student loans have on your credit score, it’s vital to understand how credit scores are calculated. Below is the scoring formula for FICO credit scores, which is the most prevalent model:

  • Payment history: 35 percent of your FICO score
  • Amounts owed: 30 percent of your FICO score
  • Length of credit history: 15 percent of your FICO score
  • Credit mix: 10 percent of your FICO score
  • New credit: 10 percent of your FICO score 

Do Student Loans Affect Credit Scores?

Now that you understand how credit scores are calculated, it’s easier to identify how they impact your credit score. Here’s a more in-depth look by category: 

Payment History 

When you successfully make your monthly student loan payments on time, you’re building a positive payment history. Making timely payments is vital since payment history accounts for 35 percent of your credit score. As long as you’re consistently keeping up with your student loan payments, you’re contributing to a good credit score.

However, it’s an entirely different story if you’re not keeping up with your monthly payments or making late payments. Late payments can have a significant negative impact on your credit score. For federal student loans, your loan servicer will report your account as delinquent to the credit bureaus once you’re 90 days late. For private student loans, the reporting may occur as soon as your account is 30 days past due. 

Amounts Owed

A high outstanding loan balance can affect your credit utilization ratio. Even if you’re making your payments on time, having a high balance can have a slight negative impact on your credit score. However, credit utilization is typically a more significant factor when dealing with revolving credit types like credit cards, as opposed to installment loans such as student loans.

Length of Credit History

It’s beneficial to start making payments on your student loans early to build a lengthy credit history. The longer your history of consistent payments, the better it is for your credit score.

New Credit

Having a mix of credit types in your credit history is also ideal for your credit health. By including student loans in your credit mix, you’re showcasing your ability to manage different types of credit responsibly. This can be particularly important for students who have yet to have the opportunity to build their credit history through other means, like credit cards or auto loans.

Positive Impact of Student Loans on Credit Scores

Both federal and private student loans can positively and negatively affect your credit. Here’s a look at the upsides: 

On-time Payments

One way student loans can positively affect your credit score is through on-time payments. Consistently making timely payments demonstrates to lenders that you are responsible and creditworthy. 

Credit Mix

Another way student loans benefit your credit score is by adding to your credit mix. Lenders like to see diversity in the types of credit you’ve handled, such as credit cards, mortgages, and installment loans. Since student loans are a part of that mix, they contribute to this aspect of your credit score. A diverse credit portfolio indicates that you can manage various forms of credit responsibly, which can improve your credit score.

Length of Credit History

Student loans can positively impact the length of your credit history, another factor contributing to your credit score. A more extended credit history typically results in a higher credit score, as it demonstrates that you have more experience in managing your credit. As you continue making timely payments on your student loans, the length of your credit history will continue to grow, further benefiting your credit score.

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Negative Impact of Student Loans on Credit Score

Unfortunately, some borrowers experience negative impacts when their student loans are reported to the credit bureaus

Late Payments

Late payments can significantly harm your credit score, as payment history is a significant factor in determining your overall creditworthiness. When you miss a payment on your account, this negative information could be reported to the credit bureaus. (As mentioned above, federal and private student loan delinquencies are reported as soon as 30 days and 90 days, respectively). And unfortunately, your credit score could drop significantly. To avoid late payments, consider setting up automatic payments or payment reminders to stay on track.

High Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a key factor that lenders assess when determining your ability to repay a loan. A high DTI can negatively impact your credit score and make it more difficult for you to secure loans or lines of credit in the future. Student loans often contribute to a high DTI – they are typically long-term financial commitments with potentially high-interest rates. To lower your DTI, focus on paying off your student loans as quickly as possible or consider refinancing options that can lower your monthly payments.

Defaulting on Student Loans

Defaulting on your student loans can have severe consequences for your credit score. When you default on a loan, not only do you face potential legal action, but the default is also reported to the credit bureaus, leading to a significant drop in your credit score. Additionally, defaulting on your student loans may result in wage garnishment, tax refund offsets, and the inability to obtain future federal student aid. To avoid defaulting on your student loans, contact your loan servicer to discuss repayment options or hardship assistance programs that may be available to you.

How to Manage Student Loans and Maintain a Good Credit Score

Student loans don’t have to mean bad news for your credit. Consider these strategies to effectively manage your balances and preserve your credit rating. 

Paying Off Student Loans on Time

One of the most crucial aspects of managing your student loans and maintaining a good credit score is to always pay your loans on time. This shows lenders that you are responsible and can handle debt, positively impacting your credit score. Timely payments can boost the payment history factor of your credit, which is another significant component in calculating your overall credit score.

Being Proactive and Making Extra Payments

Another important habit to cultivate is paying extra toward your student loans when you have the financial means to do so. By making additional payments, you can reduce the overall interest you’ll have to pay and shorten the life of your loan. This strategy also demonstrates your commitment to paying off your debt and can help improve your credit score.

Considering Loan Consolidation and Refinancing

Loan consolidation and refinancing may be suitable options for you to manage your student loans effectively while maintaining a good credit score. Consolidation combines multiple loans into a single loan with a fixed interest rate, simplifying the repayment process. On the other hand, refinancing allows you to obtain a new loan with a lower interest rate, reducing your monthly payments and saving you money in the long run. However, ensure you weigh the pros and cons of both options before proceeding, as it might not be ideal for every individual’s situation.

Periodically Monitoring Your Credit Score

To maintain a healthy credit score, it is vital to keep tabs on your credit health. By monitoring your credit reports, you can quickly identify any errors, discrepancies or areas to improve regarding your student loan management. You’re entitled to a free weekly credit report (through the end of 2023) from each of the three major credit bureaus – Equifax, Experian, and TransUnion. Utilize this opportunity to review your credit history and take the necessary actions to improve your score. 

Avoiding Mistakes While Repaying Student Loans

It’s also important to avoid common pitfalls associated with repaying student loans. Avoid missing or skipping payments or not keeping your student loan servicer in the loop if you encounter financial difficulties. You should also refrain from ignoring the potential financial consequences of defaulting on your student loans. 

Monitor and Boost Your Credit Score with Experian

By being diligent and staying informed about your student loan repayments, you can contribute positively to your credit history and maintain a good credit score. 

When managing your student loans, it is important to know how they can affect your credit score. Using Experian, you can monitor your credit report and learn more about ways to ensure your student loans have a positive impact on your credit score. 

Sign up for a free account today at Experian.com to access an assortment of tools to help improve your credit health. You can also get your credit score for free without having to put a credit card on file.

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