Do Student Loans Affect Your Credit?

Student loans are a necessity for millions of American college graduates. Having tens of thousands of dollars in debt can seem intimidating, but credit monitoring bureaus and lenders have designed their credit and loan criteria to allow for individuals to have some debt.

Your student loans are one of many sources of debt considered in your credit score, which is compiled and monitored by three major credit bureaus. This credit score impacts your ability to access car, home, and personal loans in the future, so it’s important to understand how your student loans affect it.

Although having student loans can affect your credit score in negative ways, having a history of consistently paying off those loans can also boost your credit score. If you’re midway through paying off a loan, you may find that your FICO score has bounced back due to your on-time payments.

Amount of Debt Matters

Having a large amount of unpaid debt will inevitably reduce your credit score. Because many student loans add up to tens of thousands of dollars, it’s normal for your credit score to be less than perfect during your first few years after college.

However, the amount you’ve already paid off makes a large impact too. If you were originally approved for a large loan but managed to pay most of it off, your credit score could still be close to perfect even if you haven’t paid off the full loan yet.

Your income level also affects your credit score through your debt to income ratio. Having a high income can minimize the overall impact your debt has on your credit score, while a low income could seriously damage your credit score if paired with high debt.

On-Time Payment History

Your payment history makes up a stunning 35% of your credit score, so on-time student loan repayments are essential. Unlike rent and other non-loan expenses, on-time student loan payments are reported to major credit bureaus every single month.

This allows you to build up your credit score quickly, even if you have little other credit history. In this sense, student loans can be more of an opportunity than a burden.

Late Payments

One or two late payments won’t ruin your score, but multiple late payments can start to add up. Late payments incur late fees as well, making it harder to afford to pay in future months.

Any severely late payments that get sent to collections will have an even larger impact. Your debt won’t be considered in default until you reach three months of missed payments for private loans, and nine months of missed payments for federal loans.

Both late payments and defaults will remain on your credit report for seven years, keeping your credit score from reaching its full potential. This is the case even once the missed payments are fully repaid, so make sure to stay up-to-date.

Most payers manage to avoid late payments by setting up automatic payments each month. If you’re having trouble making payments on time, you may be able to talk to your federal or private loan servicer to adjust the due date, or you may be able to refinance your loan.

Student Loan Refinancing

Student loan refinancing is helpful for students with one or multiple loans who want a new, lower interest rate. A lender will pay off your existing private student loans and federal student loans, then charge you a lower monthly payment. This allows you to save money and avoid late payments due to a lack of available funds.

The lower monthly payment is possible due to a longer loan term, a lower interest rate, or both. The amount of savings possible varies, but in some cases, unlocking a lower interest rate through refinancing can save you hundreds of dollars per year.

Eligibility depends largely on your loan balance and payment history but also takes other credit report factors into accounts. However, most personal loan providers are willing to work with you even if your credit score is poor.

Submitting a full application for student loan refinancing can cause a small, temporary dip in your credit score when you initially apply. This dip is typically around five points, but it can increase if you submit full applications for refinancing with multiple providers. Eventually, a refinancing plan can more than make up for this drop by making it easier for you to afford payments each month.

Other Impacts on Your Credit Score

Fortunately, your student loan debt isn’t the only thing affecting your credit score. Car payments, credit card debt, mortgages, and any other debts and lines of credit can improve your score. Even an unused line of credit may help boost your score by reducing the percentage of available credit you’re using.

However, for some lenders, student loan debt makes up the majority of credit history on your credit report. If you didn’t have much credit card activity in college or don’t have a car, the lack of other credit history makes your student loans more important. A few late payments could have a big impact if there isn’t a longer credit history to offset it.

Having student loans on your credit score can also positively impact your score by improving your credit mix. Credit mix is the number of different types of credit in your credit history. Although credit mix makes up just 10% of your credit score, it can make a positive difference for young people trying to build their credit score.

Student loans are a type of long-term loan known as an installment loan. This type of debt is less damaging than revolving debt, such as credit card debt.

Monitoring Your Credit Score

You are entitled to a free copy of your full credit report annually. Many banks and credit unions, including T&I Credit Union, also provide free monthly score updates for credit card holders. As you pay off your loans, your credit score will improve as long as you do not miss a payment or incur other large debts.

You will also want to check your annual report closely to ensure there are no errors. While some errors are signs of potential fraud, others are just mistakes that need to be cleared up. Incorrect information on missed payments or the amount of money owed could have a serious impact on your score, and therefore affect your applications for other credit.

After Loans are Repaid

After your loans have been repaid and the accounts closed, their history stays on your credit score for up to 10 years. As you start to apply for home loans, banks and credit unions will look at your credit report and see a score that reflects your long history of paying off past debts on-time.

Although you don’t need to wait until your student loans are fully repaid before applying for homes or auto loans, it’s wise to wait as long as possible. Your interest rate for your new loan will partly depend on your current credit score, so waiting until your loans are fully paid off could result in significant savings. However, the potential boost to your credit score may fade after 10 years, so don’t wait too long.

Getting the Best Loans

Student loans clearly have an impact on your current and future credit score, especially if you fail to make payments on-time. Although the impact of your student loans may be mitigated by maintaining and paying off other kinds of debt, they are still part of the overall formula that decides your score.

If you need a student loan to finish college or get an additional degree, don’t let the impact on your credit score scare you away. Getting a degree can boost your income, making it easier to access other types of credit in the future. Refinancing your existing student debt can also make your loans more manageable without significantly reducing your credit score.

T&I Credit Union is dedicated to helping you pursue your goals in life, including your career and education goals. We offer new student loans, student loan refinancing, and other personal loans in addition to our standard account services.

Our teams are standing by 24/7 to help you understand your options. Give us a call at 1 (800)-338-3908 to learn more about how to reach your financial and career goals with our help.

About Marsha Smith

Marsha Smith was born and raised in Ohio, where she obtained her Bachelor of Arts in Public Affairs. She is passionate about financial literacy and helping other young people navigate student loans, car payments, and buying a home.