Guide to Building Good Credit Using Student Loans


It’s easy to lament about student loan debt. Interest eats away at your hard-earned dollars and the payments can seriously cut into your monthly budget. But student loans aren’t all bad news — they can help build your credit.

If you’re curious about strategies for building good credit, learn how to use your student loans to your advantage.

Why Is Credit Important?

Credit affects your ability to borrow in the future (hello, mortgage!) and navigate adult life easily. Your credit score, which is a numeric value that represents your creditworthiness, is used in a variety of life situations.

Looking to buy a home or car? Your credit will be checked. Need to move into your own apartment? Better have good credit. In some cases, your credit is a factor in employment decisions, too.

“Many jobs check your credit history to see if you are responsible with your finances or are  having any financial issues. It may be another factor in who gets the job,” said Peter J. Creedon, a CFP with Crystal Brook Advisors.

If you have poor credit, or no credit history at all, accomplishing basic goals like renting an apartment or getting approved for a credit card can be difficult. Plus, having good credit can help you get approved for better interest rates on student loan refinancing, credit cards, and more.

How Do Student Loans Build Credit?

Student loans are installment loans, which differ from revolving credit lines such as a credit card or HELOC. Installment loans are provided once, then paid back over a set period of time in regular installments.

Installment loans affect your credit profile, but how it affects it depends on you. It doesn’t matter if you have federal or private student loans — what matters is that you are responsible with your debt and make on-time payments.

Jason Reiman, CFP at, explained, “When it comes to credit, and thus, building a positive record and credit score, time and consistency are two of the most important factors. Thus, student loans play a significant part in building good credit.”

Being in good standing with your student loans can help build good credit even if you don’t have a credit card or any other loans.

I know this first hand. I was credit-averse and didn’t get my first credit card until age 28. But I did have student loan debt and always made on-time payments.

By borrowing for my education (which I had to do) and paying back my loans on time each month, my credit score was 720 — enough to get approved for my first apartment.

Building Good Credit Using Student Loans

If you have student loans, there are a few things you can do to ensure your loans help build good credit and don’t tarnish your credit profile.

1. Make payments 100 percent on time.

Your payment history is a huge factor when it comes to building good credit. Creditors look at your payment history to determine if you are creditworthy — your past is an indicator of the future and if you have missed or late payments, it will affect your credit negatively.

“Payment history makes up the largest share of the credit score algorithm – 35 percent,” said Mary Monroy, a student loan counselor at ClearPoint Credit Counseling Solutions. “Student loan borrowers can use their loans to their advantage to build good credit by ensuring that payments are made on time once they go into repayment.”

Your FICO credit score, which is a commonly used score, is determined by a variety of factors in addition to payment history. Also considered are amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent) and credit mix (10 percent).

So while payment history isn’t the only thing that affects your credit score, it is the largest determining factor.

To help keep your payments on track, consider signing up for autopay through your loan servicer, which allows you to automatically deduct payments from your bank account each month.

“Many servicers will offer an incentive to borrowers of a .25% interest rate discount if ACH payment method is chosen,” said Monroy.

If you don’t think that’s the right option for you, sign up for online reminders or put a notification in your calendar a few days before the due date.

2. Make your payments affordable.

If your payments are overwhelming and you struggle to make them each month, you may skip a payment because you can’t afford it. But remember, rule number one: always make on-time payments. So what can you do?

“If you have private loans, see if you can qualify for a lower fixed rate,” recommended Andrew McFadden, Founder of Panoramic Financial Advice. “If you have federal loans, there is a good chance that you can qualify for income-based repayment if your loans are substantial compared to your income.”

3. If you can’t make payments, contact your loan servicer immediately.

If you really can’t afford your student loan payments, talk to your loan servicer immediately and see what options are available. Don’t wait. You may be eligible for an income-driven repayment plan or deferment until you get back on your feet.

Having student loans can play a positive role in building good credit, so long as you make on-time payments and keep them under control.

Doing so can help you in other areas of your life — with good credit, you may be eligible for student loan refinancing, lower interest rates and more. In the end, being a responsible student loan borrower can lead to other opportunities that can boost your finances.

Photo credit: Got Credit

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