Americans owe more in student loans than they do on credit cards, but how does that debt impact the rest of their financial lives? If the day comes when you want to buy a new car or a house, will your old college debt make it harder? And how do student loans affect credit scores?
Your credit score can boost or sink a home mortgage application, an auto loan, your insurance rates and sometimes even employment interviews. Whether you get a loan, and how much interest you wind up paying, can all come down to that magic FICO number.
So, do student loans affect your credit score? Yes, they do in several ways, including some you might not expect.
How do student loans affect a credit score?
Student loans are considered “installment loans,” meaning they generally carry a starting balance that’s repaid over time with a fixed number of payments. Home mortgages and auto loans also typically fall in this category.
FICO, which issues the most widely used credit score, treats installment loans differently than revolving debt, such as credit cards. With revolving credit, balances tend to go up and down over time. Borrowers access this credit whenever they need it. In the case of credit cards, that can mean any time you make a purchase.
All installment loans are treated the same way when calculating your FICO credit score — student loans don’t have their own category or receive any special consideration. It also doesn’t matter if your student loans are federal or private. Both are treated the same.
But just having a lot of these installment loans won’t necessarily hurt your credit score by itself. Debt usage — also known as your “credit utilization ratio” — makes up 30% of your score, according to Experian, but this is based only on revolving credit, not installment loans. So having $50,000 in credit card debt is likely worse for your credit score than $50,000 in student loan debt.
This isn’t to say that your student loan balance has no impact at all. If you apply for a mortgage, for example, the lender might look at your debt-to-income ratio — the amount you pay on your debts each month compared to the amount you make in income. In this case, a pile of college debt could make it harder to get approved.
But generally, when it comes to installment loans like student debt, balances turn out not to be such a huge concern. Instead, it’s the payments that matter.
It’s all about your monthly student loan payments …
The biggest relationship between student loans and credit scores involves whether you’re making your payments on time and in full.
Payment history accounts for 35% of your FICO score — the most of any factor. Just one late payment can cause your credit score to drop.
While how much your credit score changes depends on many factors, consider these two examples from myFICO: Alex, who has an average credit score of 680, could lose 60-80 points from just one 30-day delinquency, while Benecia, who has an excellent score of 780, stands to lose 90 to 110 points.
Loans in default or collections can hurt even more. Being a few days behind on a payment probably won’t hurt your credit score, but if you’re 30 days or more late on a private loan, it can appear on your credit report. For federal student loans, late payments are reported to the three major credit bureaus after 90 days of delinquency. (Though in both cases, you’re fine if your loans are in deferment.)
If you’re having trouble making payments, consider the various repayment options so you can keep paying on time.
How student loans could help your credit
Just as student loans can hurt your credit, they can help your credit as well.
Part of the FICO calculation includes credit mix — the different types of loans and lines of credit you have. Having both installment loans and revolving loans on your credit report can be a good thing for that metric.
And while credit mix is a relatively small factor in your credit score, at just 10% of the total, it can give you a little boost if both types of debt show up on your credit report.
(Keep in mind that once you pay off your student loans, it’s possible you may see your credit score drop slightly if that student debt was your only open installment loan. But financial experts don’t advise avoiding paying off student loans for the sake of your credit mix.)
The length of your credit history also serves as 15% of your credit score, and since student loans are often attached to long repayment periods, this can help you build a healthy credit file. Of course, it’s always best to pay the loan off as quickly as possible, instead of keeping it open just for the sake of your score.
Don’t sweat your student loan debt
While this article has covered a lot of the ways student loans can impact your credit score, you may be better off looking elsewhere if you want to increase your FICO number. As FICO itself says, credit cards are usually much more crucial.
“It’s important to note that while student loan debt can factor into the FICO score, credit card debt has a larger influence,” FICO stated in its blog. “That’s because we’ve found that credit card indebtedness has a stronger statistical correlation with future borrower performance than installment loan indebtedness.”
And regardless of what kind of debt you have, make sure to keep tabs on both your credit score and credit report. You can do this for free, so there’s no reason not to be vigilant.
Don’t forget these three key takeaways:
- Student loans are treated the same as other types of loans for your credit score.
- Having more student loan debt isn’t automatically bad for your credit score.
- Focus on making student loan payments on time. It’s likely to have the biggest impact of anything related to your student loans and credit score.
Laura Woods contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.36% APR (with Auto Pay) to 7.82% APR (with Auto Pay). Variable rate loan rates range from 2.41% APR (with Auto Pay) to 6.99% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.45% effective May 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.41% – 6.99%1||Undergrad & Graduate|
|2.41% – 7.89%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.38% – 6.81%4||Undergrad & Graduate|
|2.41% – 8.19%5||Undergrad & Graduate|
|2.60% – 9.60%6||Undergrad & Graduate|