How Do Student Loans Affect Your Credit Score?

How do student loans affect your credit score?

Whether you’re buried with over $100,000 of student loan debt or in the home stretch of repayment, you’re likely thinking about your future. And while you’ll hopefully say goodbye to student loan debt, you may need to qualify for a loan, credit card, or other financial product in the future.

Home mortgage, auto loans, insurance rates, and even employment interviews all depend on your credit score. Interest Rates for many of these are greatly impacted on your credit score as well. A bad credit score can cause banks to penalize you with higher interest rates or flat out reject your application.

For now, you might be wondering: Do student loans affect my credit score? Yes, they do in several ways, including some you might not expect…

Here’s how student loans affect your credit score:

Student loans are considered an installment loan. An installment loan generally has a starting balance that’s repaid over time with a fixed number of payments. Home mortgages and auto loans typically fall in this category, too.

FICO, which issues the most popular credit score, treats installment loans differently than revolving debt like 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.

Will more student loans hurt your credit?

The short answer: Not necessarily. Student loan balances generally aren’t treated the same as balances on revolving credit, and FICO places more weight on revolving credit (more on this below). So having $50,000 in credit card debt is likely worse for your credit score than is $50,000 in student loan debt.

According to FICO, 7% of consumers with more than $50,000 in student loan debt had excellent scores of over 800 points. While balances on credit cards impact your credit score, this isn’t the case for installment loans. Instead, it’s the payments that matter.

But while your balances might not have a large affect your credit score, they can affect your eligibility to take out other loans.

For example, mortgage lenders often look at your debt-to-income ratio. This compares how much total monthly debt payments you make vs. your income. If this ratio is too high, meaning you have too much debt relative to your income, you may be turned down for a loan.

It’s all about your monthly student loan payments…

For student loans, the biggest impact on your credit score will likely be related to payments. Particularly, if you’re making payments on time and in full.

In general, payment history accounts for 35% of your FICO score. This is the biggest piece of the pie. Just one late payment can cause your credit score to drop. While how much your credit score changes depends on many factors, this example from myFICO shows just how bad it can get.

In the example, Alex, who has an average credit score of 680, could lose 60-80 points from just one 30-day delinquency. Benecia, who has an excellent score of 780, stands to lose even more. A missed payment would drop her score by 90 to 110 points.

Loans in default or collections, which often include many late payments, can hurt even more. While payments do matter (more on that in a second), having loans in deferment doesn’t. You won’t be penalized for your loans that are in deferment.

If you’re having trouble making payments, consider the various repayment options so you can keep paying on time.

Student loans could help your credit!

While taking on debt typically isn’t a good strategy for improving your credit score, student loans may still help.

Part of the FICO calculation includes credit mix. This factor looks at the different types of loans and lines of credit you have. Having both installment loans (which include student loans) and revolving loans (like credit cards) on your credit report can be a good thing for your credit mix.

While credit mix is a small factor (about 10% of your credit score), it can give you a little boost if both types show up on your credit report.

Keep in mind that once you pay off your student loans, there will still be an entry on your credit report. However, it’s possible you may see your credit score drop slightly if student loans are your only open installment loan. But financial experts don’t advise avoiding paying off student loans for the sake of your credit score.

Don’t sweat your student loan debt.

While we’ve covered a lot in this post that can impact your credit score, you may be better off looking elsewhere if you want to increase your credit score.

FICO says that credit cards generally have a greater impact on your credit score than do student loans. “It’s important to note that while student loan debt can factor into the FICO Score, credit card debt has a larger influence,” FICO writes. “That’s because we’ve found that credit card indebtedness has a stronger statistical correlation with future borrower performance than installment loan indebtedness.”

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 any related to your student loans and credit score.

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Published in Federal Student Loan Repayment, Federal Student Loans, Financial Tips, Pay Off Student Loans, Student Loan Repayment

  • MN Autonomic Gal

    All of my student loan debt has been paid, however I have 14 Student Loans showing on Equifax and 13 on Transunion. They are all paid and closed, some coming up on 10 years in Sept 2016 with no missing payment history, etc. Should I dispute these to remove them or would it hurt my score to do that? I am trying to raise my credit scores.

  • Hi,

    From your case, it does not sound to me like disputing this information would positively impact your credit score. If there are no negative remarks, it doesn’t seems to me like having these student loans on your credit report would hurt your score. Have you read or heard otherwise somewhere?

    Let me know if there’s anything else I can do.

    Best,

    Jeffrey

  • Shannen Brown

    My husband has 3 education loans through Great Lakes Loan. They were in default, but he just finished a 10 month loan rehab program through their third party company Performant. His credit score is currently in the 500s… I have a few questions regarding the consolidation process. Will consolidating his loans immediately remove the default loans from the credit report? And do you think the drop his score will suffer will be more significant than the increase it should see now that the defaulted loans are no longer present?

  • Hi Shannen,

    To answer your question, no, consolidation of a defaulted loan does not remove the “default” status from a credit report. Only rehabilitation does that. You can read more about this here: https://studentaid.ed.gov/sa/repay-loans/default/get-out

    I’m not sure I understand the second question. Can you please explain?

    Thanks,

    Jeffrey

    • Shannen Brown

      Thank you that really helps! I wasn’t aware that going through a loan rehabilitation program would remove the default status. He was told on the phone that really his only option was to consolidate, even though the rep knew we had just finished the program.
      The second questions doesn’t really apply now since the default status should be taken off next month. But I didn’t know if taking the hit in credit score due to opening the consolidated loan would be more significant (or worth it), than the increase we technically should see from having a default loan removed.

  • frisby

    If I have never had a credit card and have student loans but am still a student (payments are not due yet), do I have a credit score?

  • Hi Frisby,

    Yes, you should have a credit score. I’d recommend signing up for CreditKarma or another service to check out what your credit score it.

    Cheers,

    Jeffrey

  • Laura

    Is there a way to combine my student loans on my credit report? According to Credit Karma it shows poor in that category because I have 7 loans but 6 of them are deferred student loans.

  • AD

    Does consolidating student loans help your credit score and does it remove old default payments? I guess I need to know if having 1 consolidated loan helps your credit score versus have multiple student loans showing on the report.

  • Hi Laura,

    You should be able to do this if you consolidate your student loans. However, I’m not sure you’d want to do this for the sake of your credit score.

    You might not need to be worried in any case. According to Credit.com, “Student loan deferments have no impact whatsoever on your credit scores. The same is true for student loans in forbearance. Both are noted in your credit reports, but neither indicator will hurt your credit score.”

    http://blog.credit.com/2013/03/how-student-loan-deferments-affect-your-credit-64835/

    I hope this helps. If you have other questions, let us know.

    Best,

    Jeffrey

  • HI AD,

    To be honest, I’m really not sure. I do not believe that it would remove old default payments just by consolidating.

    Best,

    Jeffrey

  • Shananagans

    if i consolidate my student loans does the loan type change or will they still show as
    student loans on my credit report?

  • Hi,

    Your student loans should still be listed as student loans on your credit report if you consolidate.

    If you have other questions, let me know!

    Best,

    Jeffrey

  • Toni

    I have several student loans in deferment at this time. I’m considering consolidation. My credit score is low to mid 600. I’m trying to raise it. If I am considering purchasing a home and/or vehicle in the next few months would deferment look better on my credit score than consolidation? Should I leave the consolidation process alone until I make my other purchases?

  • Dee Combs

    I took out a student loan last month for Grad School and it was just reported to Equifax the beginning of Sept. My credit score, which I have been paying off a few things and working on getting it up, dropped 50 points as a result of it being reported. I am in deferrment because I’m a full-time student but shocked just the fact that I took out the loan could drop that much. Would it help to make monthly payments on it even if I don’t have to? Thanks!

  • william

    My student loan has badly affected my credit score to a point I was getting depressed and tried getting help to fix my credit really fast, from big credit repair companies who advised I pay required interests on the loans have paid off, with this my credit score only got better to 538,My lender told me ill need 100+ to get a mortgage loan.before April, it all seems impossible because the lawyer I tried to hire to help dispute collections on my credit is asking for a down payment of $1000 which I don’t have till my accountant suggested I contact hackhempATgmailDOTcom who was able to help raise my score to 779 in less than four weeks, information to his service helped me back on my feet. Im sure this can help someone here too.