How Student Loans Affect Your Credit Score

how do student loans affect your credit score

If you have student loans to your name, you’ve likely wondered, “How do student loans affect your credit score?” In truth, they do have an impact on your score. However, the good news is that borrowers have control over the type of impact they experience, specifically whether it is positive or negative.

We’ve created a guide on the effects of student loans on your credit score below. Keep reading to learn about how these loans affect your score and what you can do to ensure that the impact is as positive as possible. 

Do student loans affect your credit score?

The simple answer to this question is yes.

Student loans are a type of installment loan, which means they typically have a fixed loan amount and are paid back over time through a series of regular payments. All installment loans, including mortgages, student loans, and auto loans, have an impact on your FICO score and credit report. This means that your student loans will affect your credit, regardless of if they are private or federal.

How much do student loans affect credit score?

Fortunately, student loans may have less impact on your credit score than having a similar amount of credit card debt. According to Experian, your utilization ratio, which measures how much credit you’re using versus how much credit you have available to you, is based only on revolving credit or your credit cards.

With that said, student loans do impact your credit score. However, they may have both a positive and a negative effect on your score. We’ve listed the main impacts below. Read them over to get a much clearer idea of how your score will be affected.

The negative impacts of student loans on a credit score

  • Late payments affect your payment history: MyFICO says that payment history accounts for 35% of your overall credit score, making it the largest determining factor. In light of that, it is essential to make sure that you make all of your student loan payments on time. If they are late, it can hurt your credit score.
  • Loans in default will have an even more significant impact: If you have private student loans, once payments are more than 30 days late, your student loan account will be considered in default and sent to collections. If you have federal student loans, your account will go to collections 90 days after your missed payment. However, once an account is sent to collections, it will be reported to the credit bureaus and will have an even greater negative impact on your credit score.

The positive impact of student loans on a credit score

  • On-time payments can boost your payment history: Again, payment history has a sizable impact on your credit score. If you have a less-than-perfect payment history right now, ensuring that you make all their student loan payments on time can go a long way towards helping you grow your overall credit score.
  • Having student loans improves your credit mix: Credit scoring models favor reports with a good mix of both revolving credit and installment loans. While MyFICO reports that credit mix only accounts for 10% of your overall score, if you don’t have any mortgages or auto loans in your name, taking out a student loan could help improve your score by increasing your credit mix.
  • Student loans can add to your credit history: Finally, the length of your credit history also impacts your score. My FICO estimates that it accounts for about 15% of your overall score. Since student loans often come with a long repayment term, your accounts may help to bulk up your credit report.

The other financial impacts of student loans

Remember that your credit history is not the only financial aspect that your student loans will impact. In particular, your student loans will have an impact on your debt-to-income ratio (DTI), which can be important if you are thinking of buying a home in the near future.

At its core, your debt-to-income ratio measures your income coming in each month vs. the amount going towards paying down debts. In this case, lenders look at this ratio to ensure that you won’t stretch yourself too thin if you take on a home loan. Typically, they look for a ratio of 43% or lower.

Here, the amount you owe in student loans will directly impact your DTI ratio. If you’re thinking of buying a home soon, work on paying down loans as much as possible. You may have questions on how student loans can impact mortgage approval odds. If so, your best bet is to talk to a lender or student loan attorney.

The bottom line on student loans and your credit score

All factors considered, don’t worry too much about student loans hurting your credit score. As long as they are correctly handled, they can have a positive impact on your overall credit history. 

Make sure you follow good credit practices, such as making all of your payments on time. Additionally, pay as far above the minimum payment as possible. If you stay current with your repayment plan, your credit should remain in good shape.

Tayne Law Group can provide you with valuable information on how to ease the burden of your student loans. If you are interested in finding out more about what repayment options are available to you or you are challenged with your student loan debt, contact Tayne Law Group today via our online contact form or call (866) 890-7337 for a free phone consultation.

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