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How student loans impact your credit score

How Student Loans Impact Your Credit Score

Updated on October 23, 2022


For many people, student loans are their first experience using credit. From the moment you take out a student loan, a credit file is opened in your name. This kick starts your credit history and gives you the opportunity to either build-up or tank your credit score.

When taking out a student loan, it is important to consider how it will affect your credit score in the future. Your score can determine your ability to take out loans, get lower interest rates, and obtain approval for apartments or rental houses. As such, student loans have a large impact on your life and can stick with you for a few years or decades, depending on how quickly you are able to pay them off.

It is important to note that the amount of a student loan itself doesn’t positively or negatively impact your score. How student loans impact your credit score all comes down to how you pay them off. That being said, the following factors that contribute to calculating your FICO score can all be impacted based on how manage your student loan debt.

Payment History

Payment history accounts for 35% of your FICO score. As such, it impacts your credit score more than any other factor. This is because lenders want to be sure that you are financially responsible enough to pay off potential loans in the designated timeframe.

If you make payments on time and in full, your score could actually increase as a result of taking out a student loan. Every time you make a payment for your loan, it is reported to credit bureaus which can help you build a strong payment history. This is a great way to start building credit right when you enter adulthood and will help you get additional loans later down the line—as long as you are responsible.

On the other hand, if you fail to make payments on time, your payment history could just as quickly turn against you. When you miss a payment, your lender will report the action to one or multiple credit bureaus. This will show up as a delinquency on your report. For private student loans, delinquencies can be filed just 30 days after a missed payment. If you have a federal student loan, you usually have up to 90 days before the missed payment will be documented.

While your score will not drop until the delinquency has been reported, lenders often charge a late fee as soon as the payment is missed. Even more pressing is the fact that missed payments stay on your report for up to seven years and can quickly tank your credit score. If you know you will be unable to make a payment on time, call your lender immediately so they can put your loans into deferment or forbearance. This means that a temporary pause will be placed on your monthly payments. By doing so, you do not get out of paying off a loan. However, it will protect you from getting late payments on your credit score.

Build Your Credit History

Student loans are considered an installment loan. This means that an agreement is made to repay a specific amount of money over time following a set number of scheduled payments. The amount of time in which installment loans are repaid can range from a few months to a few decades. The long repayment periods of student loans have the potential to help your score by building a long credit history.

The duration of your credit history impacts 15 percent of your credit score. The longer your positive credit history is, the higher your score will be. However, this history will only benefit you if you make your payments on time. Paying loans in full every month can show future lenders that you are financially responsible which will give your score a boost.

While building a long credit history can positively impact your score, you should not intentionally draw out how long it takes for you to repay your loans. If you have the opportunity to pay them off quicker, you should take it. The potential 15 percent benefit of increasing your credit history is not worth staying in debt for a longer period of time.

Credit Mix

Your credit mix has a much smaller impact than your payment history, but it can give your score an enhancement of up to 10 percent. Your credit mix refers to the various types of loans and lines of credit that make up your report. In addition to student loans, these accounts may include credit cards, auto registration loans, and mortgages. Adding variety to your credit mix will look favorable on your credit report. This is because people with fewer forms of credit are often viewed as “higher risk” than those who have shown their ability to manage multiple types responsibly. As such, having a student loan could slightly improve your score in the future as you take out other loans or start using a credit card. However, according to the director of public education at Experian, Rod Griffin, it is unwise to open a credit account if you do not intend to use it.l

“One or two credit card accounts is sufficient,” Griffin said. “And, if you don’t have any installment credit, you may consider applying for a small loan so that you can demonstrate that you can manage it well. However, opening too many new accounts within a short period of time can be a sign of financial distress to lenders.”

While your credit mix doesn’t play a key role in determining your FICO score, it can have a significant impact when calculating the score of credit reports that don’t have much other information on them.

At the end of the day, how your student loans impact your credit score entirely depends on your own habits. To keep track of how student loans impact your credit score, you are entitled to one free credit report a year from all three of the major credit bureaus.