How Student Loans Can Help and Harm Your Credit Score and What You Can Do About It

FT Contributor
A sad student looks over a credit score document.

In early 2019 Americans collective owed $1.5 trillion in student loan debt. This staggering sum has crippled young graduates as they attempt to find their financial footing; nearly seven out of 10 graduates with existing loans report that they are struggling financially.

If you’re considering taking on student loans as you prepare for your higher education, you may be wondering if this will ultimately impact critical financial factors like your credit score.

Table of Contents

Do Student Loans Affect Your Credit?

The short answer is yes, student loans certainly will influence your credit score. Your student loans are money you borrowed from a lender, and your ability (or inability) to pay back the funds can be a significant factor in the health of your credit.

However, the influence can be both a positive and a negative one, depending on how you handle your debt. Student loans are already significant financial burdens, and it’s important to budget properly and manage repayments responsibly and on time. If you do this well, it can have a positive impact on your credit score. If you let your student loans spiral out of control, though, the negative repercussions can be quick and long-lasting.

How Can Student Loans Positively Affect Credit?

Debt is never a preferable option, and if you can find ways to pay off your student loans early, take advantage of them. However, if you find yourself managing student loans over the long term, there are many ways you can benefit from the situation.

Good Payment History

A good payment history starts with making your student loan payments on time. Your payment history accounts for 35% of your credit score. Ensuring that every payment is both for the full amount and on time can have a huge, positive impact on your credit score.

Good Credit Mix

While it isn’t as important as a good payment history, having a well-balanced credit mix can positively influence your credit score as well. Your credit mix consists of the different kinds of credit you have, including:

  • Credit cards.
  • Mortgages.
  • Student loans.
  • Car loans.

If you have $50,000 in credit, but $45,000 of it is credit cards, you don’t have a good credit mix. Student loans can help balance out your overall credit mix as you go about purchasing a car, home, and other significant items in the future.

Long Credit History

The longer you remain in good standing with your loan payments, the better off you’ll be. If, for instance, you have a $10,000 car loan that you just took out a month ago, a lender won’t have any history of how well you can make your payments.

As a general rule, the longer the average age of your lines of credit, the higher your credit score will be. Loans are not lines of credit, but your loan payment history does affect your credit score. The bigger the difference between your original balance and your current balance, the better off you are in terms of credit. Paying your student loans on time over the course of several years is an excellent way to positively influence your payment history and, by extension, boost your credit score.

How Can Student Loans Negatively Affect Credit?

When it comes to student loans, you can hurt your credit score by missing payments.

Bad Payment History

A bad student loan payment history is a serious problem. Remember, your ability to make your student loan payments responsibly affects 35% of your credit score. While this is a positive thing if your payments are on time, missing your student loan payments can also be a quick way to drag your credit score through the mud.

Loan Defaultment

While a single missed payment can have an impact on your credit score if left unaddressed, multiple missed payments will cause you to default on your loan entirely. Loan defaultment comes with a host of negative consequences, not the least of which is a serious hit to your credit score.

Hard Inquiries

One more factor to consider when applying for student loans is the possibility of a hard credit inquiry. While it won’t have the same effect as a history of missed payments or loan defaultment, a hard inquiry can still reduce your credit score slightly, and several hard inquiries can add up quickly.

Lenders will typically conduct a hard inquiry when you apply for a loan. If you’re going to shop around for the best rates for your student loan, make sure to do so within the period of a couple of weeks. This ensures multiple inquiries are counted as a single hard inquiry, rather than several separate ones.

How Can I Manage My Credit With Student Loans?

Managing your credit with student loans is matter of maintaining ontime payments. If you’re going to take out a student loan, it’s important to create a strategy to pay it back the right way. This will allow you to reap the benefits listed above while avoiding the possibility of hurting your credit score over time. Ways to manage your student loans include:

  • Setting up a thorough personal budget that takes your loan payments into account.
  • Setting reminders to make your loan payments on time.
  • Applying for deferment or forbearance if you realize you won’t be able to make payments for a certain period of time.
  • Trying to set up an income-driven repayment plan that will shift with your level of income.
  • Creating an emergency fund, in part to help you maintain your payments during any financial difficulty

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