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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
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 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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 ourstudent 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 Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
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.
3 Important Disclosures for SoFi.
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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|