Do Student Loans Affect Your Credit Score? Yes, Here’s How

Whether you’re about to take on student loans for the first time or you’ve been chipping away at your repayment plan for a while, borrowers commonly want to know: Do student loans affect credit score?

Since student loans payments are reported to the major credit bureaus (Experian, Equifax, and Transunion), they have the potential to impact your credit score. But that doesn’t mean your credit score will automatically decline. In fact, there are ways student loans can help you improve your credit score. Here’s how.

Will student loans impact your credit score?

Student loans will most likely impact your credit score, sometimes for the better and other times for the not-so-good. How much do student loans affect credit score? That depends on many factors — a lot of which have to do with you, your financial habits and your priorities.

Now, can student loans impact your ability to buy a home or car? The answer is… potentially.

To understand the ways a student loan affects your credit score, first, we need to understand how your credit score is created in the first place. Not every factor carries the same weight on your FICO score calculation.

Your credit score is determined by a number of factors such as:

• Payment history — Do you make on-time payments? This accounts for 35% of your score.
• Length of credit history — How long you’ve had credit accounts for 15% of your FICO score.
• Outstanding balances — Your credit utilization ratio shows how much debt you owe versus how much credit you have available. This accounts for 30% of your score.
• Credit mix — Do you have a combination of different types of credit? For example, installment debt and revolving accounts, like credit card debt. This accounts for 10% of your FICO score.
• New credit — Have you recently taken on a lot of new loans — like car loans — or opened credit cards? This accounts for 10% of your credit score.

Holding student loans can help you in some of these areas. But, if you have a hard time keeping up with monthly payments and regularly make late payments, your student loans could pull your credit score down.

How student loans can improve your credit score

First, the good news — student loans could help you work toward a good credit score. Here are three ways student loans might help you if you’re in need of a credit lift:

• Builds a positive payment history. Do you always pay your student loans on time each month? Great. Since your loan payments are reported to the credit bureaus, these can help build a positive payment history. If you had a habit of missing payments in the past, or paying bills late, building a positive credit history with your student loans could help you improve your credit.
• Starts your credit history. If you have no credit, student loans can help you develop a credit history. Remember that the length of your credit history accounts for 15% of your FICO score. The sooner you start building credit, the better.
• Diversifies your credit mix. It’s smart to have more than one kind of credit in your mix. Educational debt is a type of loan that’s considered an installment loan. This type of credit can help improve this element of your credit score if you only have revolving credit accounts.

If you want to buy a home or a car and are wondering if your student loans will prohibit you from qualifying for a mortgage or auto loan, the answer is: if you make on-time, monthly payments, then your student loans might actually help you.

Students loans could negatively impact your credit score

Now for the bad news. Student loans can also have a negative impact on your credit. Here’s how:

• Late or missed payments. If you make late payments or miss payments entirely, this information is sent to the credit bureaus, and will show up on your credit report. When do student loan lenders report missed payments to the credit bureau? Usually every 30 to 45 days. This is one of the most common ways people see a negative impact on their credit score due to their student loans.
• Defaulted student loans. If you default on your student loans, this will have a significant negative impact on your credit score. Keep in mind that if you default on a federal student loan the entire balance of the loan is due immediately. This occurs with most federal student loans after 270 days. For private student loans, the cutoff varies by lender.
• New credit. If you’ve authorized several hard inquiries while shopping for student loans, your credit can be negatively impacted in the short term. For this reason, it’s smart to get rate quotes using a soft credit check, and then only allow a hard credit check from the private lender you decide to move forward with.

Another thing to keep in mind is your debt-to-income ratio. This isn’t factored into your credit score, but lenders do use it for approving bigger loan applications, such as a mortgage. If you have a high debt-to-income ratio as a result of student loans there’s a chance this might impact the rate you’re offered or the loan amount you’re approved for.

Related: Does Refinancing Student Loans Hurt Your Credit Score?

Can you still have good credit with student loans?

Maybe you’ve heard horror stories about federal student loan borrowers who have bad credit, but the truth is it’s entirely possible to have good credit with student loans. Most of the people we see at Student Loan Planner have credit scores between 700 to 799.

Even though borrowers might have a lot of student loan debt, they can still have good credit scores. Student loans in good standing are least likely to adversely affect getting credit for other things, like a mortgage. Depending on your credit history before your student loans, they might even help you improve your credit score.

Keep reading: How to Remove Student Loans From Your Credit Report