October 15, 2021
Since student loans are often the first line of credit you establish, they can also mark the start of your credit history. Unlike other types of credit — like personal loans or credit cards — you can take out student loans with no credit history and no cosigner.
Once you understand the impact of student loans on your credit score — and how different ways of managing your loans can help or hurt your score — you can leverage your loans to build a healthy credit history right from the start.
Does Taking Out a Student Loan Affect Your Score?
Yes, taking out student loans does affect your credit score. Similar to auto loans or mortgages, student loans are a type of installment debt (a debt that is paid off in a set number of payments) and they affect your credit the same way.
How Student Loans Can Help Your Credit
Yes, the loan amount and payment history do go on your credit report, but that can be a good thing. Here's how student loans can help you out:
- Payment history. Payment history accounts for the largest part of your credit score (35% of your FICO credit score), so in the future that good payment history might help you get approved for credit cards, auto loans, apartment leases, or even a mortgage for your first home.
- Credit mix. Student loans also add to your credit mix. Lenders like to see a mix of secured loans (or loans with some kind of collateral, such as mortgages or auto loans) and unsecured loans (those without collateral, like a credit card or your student loan).
- Low-interest borrowing. And if you have federal student loans, you're probably borrowing at a more competitive interest rate than you'll find with other lines of credit, which always looks better than a pile of high-interest debt.
Keep in mind, while student loans can help you build credit, you should not take out unnecessary student loans just to establish credit. If you don't need a loan, investigate other ways to build credit that may be better for your financial situation.
How Student Loans Can Hurt Your Credit
Credit is essentially a test of how well you manage accounts. Usually, if something can improve your credit, it can also damage your credit, depending on your individual actions. Here are some ways you might damage your credit with a school loan:
Carrying an Unusually Large Amount of Debt in Student Loans
In this case, lenders may be unsure about approving you for new lines of credit. Especially if you're not making progress paying it down or your income is very small compared to your total amount of debt.
While loans are necessary for many students, it's not a good idea to borrow more than the minimum amount you need because this will negatively impact your credit utilization rate.
Student loans can also hurt your credit score if you miss payments. The U.S. government will report late payments on federal student loans to credit bureaus after 90 days. Private student loan lenders can report late payments after only 30 days.
These late payments, known as delinquencies, stay on your credit report for seven years and may keep you from being approved for future lines of credit.
How to Protect Your Credit if You Can't Make Payments
On-time payments are usually an easy way to build credit, but what if you hit a financial rough patch?
Contact your lender if you are struggling to make your student loan payments. If you have federal student loans, you can:
- Alter your repayment plan to lower your monthly payments
- Apply for deferment or forbearance (short periods where you are not required to pay on your loans, usually due to job loss or other short-term emergencies)
The important thing is to reach out to your lender before you miss a payment so it does not impact your credit.
Does Refinancing Your Student Loans Affect Your Credit Score?
Refinancing is a process where you take out a new loan and use it to pay off your student loans. You can refinance both federal and private student loans. Borrowers do this when the new loan offers better conditions for repayment, such as:
- A lower interest rate
- Smaller monthly payments
- Consolidation of many loans into one monthly payment
Sometimes refinancing can save you money, but it isn't always the best option. First, you'll need good credit to qualify for refinancing.
Another thing to consider is how long you've had your student loans. If your student loans are your oldest form of credit, paying them off could temporarily lower your credit score because the length of your credit history is an important factor in your score.
Before You Refinance — Consider This
When deciding whether to refinance, consider your cost savings, the impact on your credit, and whether you have other lines of credit or credit history. You may also want to find other ways to establish credit before refinancing.
If you apply for refinancing, prospective lenders will run hard inquiries. Hard inquiries on your credit report temporarily lower your credit score.
However, multiple hard inquiries of the same type count as one inquiry if they happen within the same 14-day period. So do your homework, find the lenders that offer the best deals, and apply to them all during that 14-day window.
Another option is to complete a prequalification that provides a rate estimate without affecting your credit. Not all lenders do this, but if you have this option, take it.
Does Paying Off Student Loans Help Your Credit Score?
This depends on who you ask. Although we know what factors influence your credit score, no one knows exactly how credit bureaus calculate a credit score, making it hard to know exactly how much of an impact certain actions will have.
One line of thinking is that open lines of credit (paid on time) help your credit. And older credit lines benefit your score — so paying off your student loans could drop your credit score a tiny bit.
That said, the benefit of paying off your student loans outweighs the temporary drop in your credit rating. Most financial experts encourage borrowers to finish paying their student loans and pursue other forms of credit as they can. If you're still worried about the impact of paying off your loans early, you can investigate other ways to improve your credit score that will offset this drop.
Do Student Loans Affect Your Credit Score While Still in School?
Yes, school loans affect your credit score while still in school, but not in the way you might be worried about. For instance, if your loan is in deferment, you won't be required to make payments, so you won't have a chance to miss or be late on payments.
However, whether or not your loan is in deferment while you earn a degree, school loans will still show on your credit report as existing debt, which means they can impact other types of credit you apply for such as credit cards, personal loans, or private student loans.
Student loans do reflect on your credit score, but that doesn't have to be a bad thing. If you're just starting out, they can be a good way to establish a line of credit and start building your credit history. The important thing is to be responsible—borrow only the amount in loans that you actually need, stay on top of your payments, and communicate with your student loan lender if you run into difficulties with repayment.