How Do Student Loans Affect Your Credit Score
Credit scores can have extremely positive --or negative-- impacts. Understanding how student loans affect your credit score is important to keep control of your personal finances and future.
When you take on student debt, you’re probably not thinking about how your education loans impact your credit score. However, the reality is that your student loans can impact your credit score.
Let’s take a look at how student loans affect your credit score, and how they can make a difference in your long-term finances.
Do student loans affect your credit score?
The short answer is yes. Your student loans are installment loans, meaning that you’re expected to make regular payment each month.
Installment loans show up on your credit report and your payment history is used in calculating your credit score. When you make regular, on-time payments, it can show that you’re responsible with your debt payments. On the other hand, if you miss payments, it will result in a lower credit score.
Your payment history accounts for 35% of your FICO score, so if you miss a student loan payment, it can drag on your score — making it harder for you to qualify for other loans and impacting your ability to get the best interest rates on other debt, including home and car loans.
Federal vs. private loans and your credit score
Both federal and private loans will impact your credit score as installment loans. But, do student loans affect credit when you apply?
With federal loans, there isn’t a credit requirement—almost anyone who meets eligibility requirements can get a federal loan. However, private student loans do come with a credit check. An organization, like Juno, can help you negotiate private student loan rates based on your credit, but you’ll still go through a credit inquiry.
Hard credit inquiries account for about 10% of your FICO score, so when a private lender pulls your credit for final loan approval, it could result in a slightly lower credit score.
Student loan default
Student loan default can have one of the biggest impacts on your credit score. In many cases, private lenders are likely to report your loan if you’re at least 30 days late making a payment. The longer you go without making a payment, the worse the impact. Additionally, your loans could go to collections, further damaging your credit score.
So, how do student loans affect your credit score if you are in default with federal debt? First of all, it takes longer for your default to show up on your credit report. Late payments don’t start being reported until you’re 90 days late with federal student loan payments.
If you can get a deferment on your student loans, usually due to some type of hardship or being in school, you can avoid a default. Deferment is one way to help protect your credit if you’re unable to make student loan payments — whether you have federal or private student loans.
Just be aware that you might have different requirements if you have private student loans. Using a service like Juno can help you compare hardship and deferment policies with different private lenders so that you get a student loan that works for you.
How student loans impact your debt-to-income ratio
While it’s not a direct impact on your credit score, student loans can also impact your debt-to-income (DTI) ratio. For some loans, lenders will look at what percentage of your income goes to debt payments each month.
This can be especially important if you’re trying to buy a home. Many mortgage lenders won’t approve a loan if your DTI is above 43%, and your student loan payment can contribute to that. In order to get the best possible mortgage rates, a total DTI of 36% is often required. If you have a high enough student loan payment, it can make it difficult to get approved for a mortgage or to get the best rates — especially if you have other debt as well as student loans.
Reducing your student loan payments
If you’re worried about DTI, you can work on ways to reduce your student loan payments. If you qualify for income-driven repayment, your lower payments can lead to a smaller DTI. On top of that federal loan consolidation, which increases your loan term, can also help reduce your monthly payments.
Another option is to refinance your student loans. Private student loan refinancing can help you reduce your interest rate and payment, lowering your DTI. An organization like Juno can help you negotiate rates and terms so that you’re more likely to get a payment that works for you and allows you to meet DTI requirements.
On top of that, depending on your situation, private refinancing can also make it easier to meet your payment obligations so that you’re less likely to end up with a credit issue. Just realize that when you refinance federal loans, you end up losing access to programs like income-driven repayment and federal deferment options.
Do student loans affect your credit score positively?
While there are ways student loans can negatively impact your credit score, it’s also possible for them to help your credit score. Two main ways your student loans could potentially boost your credit score are:
- Credit mix. Your credit mix involves the type of credit you have, usually revolving or installment. If you have credit cards (revolving credit), student loans can add an installment element. While credit mix only accounts for 10% of your FICO score, it can still help give you a bit of a boost.
- Credit history. This factor accounts for about 15% of your FICO score. The longer you have open accounts, the higher your score. Once again, it’s not a huge boost, but it can be helpful, especially when combined with other factors.
Your student loans aren’t likely to have the biggest impact on your credit score, but they do have some impact. Understanding how student loans affect your credit score can help you make better decisions. The best thing you can do is make on-time payments and pay down your debt as quickly as you’re comfortable with. Consider refinancing your student loans using Juno if it makes sense for your individual financial situation.
Miranda has 10+ years of experience covering financial markets for various online and offline publications, including contributions to Marketwatch, NPR, Forbes, FOX Business, Yahoo Finance, and The Hill. She is the co-host of the Money Tree Investing podcast and she has a Master of Arts in Journalism from Syracuse University
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