Your credit score is the three-digit number that dictates a lot in your adult life. Whether you’re applying for a mortgage or looking to get an auto loan, this seemingly arbitrary number determines whether you get approved for a loan and also affects your interest rate.
If you’re a student loan borrower you may wonder, “Do student loans affect credit score?” You might be especially curious if you’re in the process of applying for a mortgage. Here’s how student loans affect your credit score and what to know for big life events, like getting a mortgage.
Do student loans affect your credit score?
Student loans do affect your credit score and can even put your credit score on the map. I didn’t get my first credit card until I was 28 but had student loans as soon as I was of legal age. When it was time to move out into an apartment on my own, the landlord said they were going to check my credit score and it had to be over 700.
I was paranoid as I never had a credit card and didn’t even know if I’d have a credit score. Do student loans affect credit score? As it turned out, given my positive student loan repayments and my account history with my student loans, I had a score of 720. Just enough to get approved for my own apartment.
If you’re without a credit card, student loans can help establish your credit. So long as you continue to make your payments on time, you can continue to build your credit score too.
On the other hand, if you ditch your student loan payments and end up in default your credit can be shot (among other things like wage garnishment, where the government can legally collect up to 15% of your paycheck. Fun times.) Having student loans that are in default or delinquent could mean negative marks on your credit report for up to seven years.
How student loans affect your credit score
Knowing the “how” can help you take actionable steps to make sure there is a positive relationship between your student loans and credit score and not a negative one!
1. Your repayment history matters
Did you know that your repayment history affects 35 percent of your FICO credit score? Do student loans affect your credit? Yep, it’s true. So when you make on-time payments with your student loans, you’re building a positive repayment history which reflects well on your credit score. As noted above, if you have limited credit, student loans can also help establish your credit score.
2. Student loans affect your credit mix
There are two main types of credit — revolving accounts and installment loans. Revolving accounts like credit cards have a revolving balance that you pay back and borrow from each month. Installment loans are a set amount paid back in installments over a set period of time, like student loans. When it comes to your credit score, your credit mix affects 10 percent of your credit score.
If you already have a credit card, which is a revolving account, student loans can help your credit mix as an installment loan. Lenders like seeing a healthy mix of installment loans and revolving accounts. Having just one of these accounts is not as powerful as having both.
When lenders see that you can responsibly manage various types of loans, it helps you seem less risky in their eyes. It shows that you can handle different types of credit and manage your payments on multiple loans.
In other words, your student loans could help your credit mix in a positive way if you already have credit cards as part of your credit history.
3. Student loans affect the length of credit history
The age of your credit accounts, also known as the length of credit history makes up 15 percent of your credit score. Even just being on the Standard Repayment Plan, which is 10 years, would mean a fairly long length of credit history. In this way, student loans can boost the age of your accounts and reflect positively on your credit score.
Getting a mortgage: What to know about student loans and credit scores
A mortgage is likely the biggest loan you’ll take out (I hope!), so make sure your credit score is in tip-top shape.
To help your credit score be in the best position possible to get approved for a mortgage, you must make all of your payments on time on your student loans and of course any other debt. You want to be mindful of taking on any more student loans or types of credit as well, as new hard inquiries can make your score drop slightly.
Having student loans may positively affect your credit score with the repayment history, length of credit history and credit mix. However, it’s not just about credit score. Your student loan balance — if fairly high compared to your income — can be weighing down the possibility of you getting approved for a mortgage.
Mortgage lenders want to know your debt-to-income ratio. Ideally, your debt-to-income ratio is less than 36 percent if you want to get approved for a mortgage.
In order to get your debt-to-income ratio, you’d take your minimum monthly payments on your debt and divide that number by your monthly gross income. If this number surpasses 36 percent, you probably don’t want to apply for a mortgage right now.
If your debt-to-income ratio is high, make progress on paying down your student loans. You don’t necessarily need to pay them off given the potential credit score benefits listed above (unless you need that payment money to go toward your mortgage), but you’d definitely want to pay them down to get to a reasonable debt-to-income ratio that gives you the best shot of approval for a mortgage.
Be smart with student loans and credit
There is a link between your student loans and credit. Student loans can help make or break your credit and have an impact on applying for a mortgage.
They could be beneficial to your credit when applying for a mortgage, adding to your credit history, credit mix and repayment history. But when applying for a mortgage, your credit score is not the sole factor and your student loans could make your debt-to-income ratio less than ideal for lender’s approval.
Do student loans affect credit score? In order to use student loans to your advantage and positively affect your credit score, make your payments on time. It sounds simple but that’s the most effective way to get a good credit score despite having student loans. That way when you do apply for a mortgage, or any other loan, lenders might consider you less of a risk since your credit is in better shape.
Did you know your student loans can affect your credit score? What kind of impact is it making?