How do student loans affect your credit score?


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If you have student loan debt, you have plenty of company: nearly 45 million brethren, in fact.

One upside of having a student loan is that regular on-time payments may boost your credit score and even allow you to build a credit history that could help when it comes time to get a mortgage or take out a car loan.

Student loans are considered installment loans similar to mortgages and auto loans because they’re repaid over time with a fixed number of monthly payments, or “installments,” resulting in eventual full repayment.

In comparison, a credit card is considered revolving credit because the balance goes up and down, is open-ended, and depends on when you make a purchase and how much you spend.

Both can affect a credit score, but much of your score can depend on how you manage your student loans: Do you make your payments on time? Have you missed any payments?

Here’s a look at how student loans can factor into your credit status.

Related: Do student loans count as income?

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1. Do I Need a Good Credit Score to Take Out a Student Loan?

The answer depends on whether you’re talking about federal or private student loans.

Most federal loans don’t take credit scores into account, which is why nearly every borrower gets the same interest rate regardless of financial profile. However, federal PLUS loans for parents require that borrowers not have an adverse credit history.

For private lenders, your credit score is usually a key factor in determining not only student loan approval but also the attached interest rate.

The better your score, the better your rate, generally.

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2. Which Credit Scores do Private Lenders Use?

Most private student loan lenders use a base FICO score, from 300 to 850, to determine whether to extend credit and at what interest rate.

Because FICO is used widely throughout the lending industry, including by mortgage, auto loan and credit card providers, it gives lenders an apples-to-apples comparison of potential borrowers.

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3. How is My Credit Score Calculated?

Unfortunately, how FICO calculates your credit score is kind of a black box. While the various factors and weightings  used in the calculation are publicly available on FICO’s website, its algorithm is proprietary, which means that no one can predict exactly how a specific financial event will affect your score.

A late payment will likely reduce your score, but by how many points is anyone’s guess.

That said, there are generally three key ways to improve your credit score: Pay bills on time, keep credit card balances low and reduce the amount of debt you owe.

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4. How Does a Late Payment Affect My Credit Score?

Making payments on time is obviously important, but what you might not realize is exactly how damaging it is to not pay on time.

Even if your credit history is pristine, it only takes one report of 30 days past due to change your score. Whether you were short on cash or simply forgot to make the payment, the FICO algorithm doesn’t distinguish — and the result is the same.

FICO base scores are determined by data in five categories, and payment history leads the pack:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

Once a late payment is reported to the credit bureaus, it could remain on your credit report for up to seven years.

If you have trouble remembering to make your payments, you might want to set up an automatic payment plan. Most lenders will give you a small discount on your interest rate for doing so.

When you know that you can’t make a payment on time, talk to your lender or loan servicer right away.

The U.S. Department of Education, which is the lender for four types of Direct Loans, and some private lenders offer loan deferment and/or forbearance, allowing a borrower to temporarily suspend payments, which will minimize the impact on your credit score.

One of the purposes of a credit score is to show lenders how likely you are to repay your debts. Making your student loan payments on time and in full each month will likely have a positive effect on your credit score.

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5. Will Rate Shopping Different Student Loan Lenders Hurt My Credit?

This question pops up a lot from grad school borrowers and people who are refinancing student loans to get the best interest rate possible on a private loan.

One factor that can be a red flag for FICO is the number of inquiries it receives from lenders wanting to see your credit report. In other words, if it looks like you apply for more credit often, it could hurt your score. But the good news is that FICO attempts to distinguish between a request for a single loan and a request for many new credit lines. As long as you rate-shop in a concentrated period of time, you should be OK.

If you really want to avoid inquiry overload, do your homework before applying for a loan. Private lenders typically list online the range of rates they offer, as well as general eligibility criteria. Researching that information will give you a good idea of whether you’ll qualify before you formally apply.

Also, you may want to ask lenders if they can tell you the interest rate you would receive without doing a “hard” credit pull, which might affect your score. You can’t get a loan without an eventual hard inquiry, but getting prequalified allows you to compare interest rates with no effect on your credit score.

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6. Will Refinancing Student Loans Help My Credit?

Refinancing student loans at a lower interest rate can have an indirect positive effect on your credit. For example, if refinancing lowers your monthly payments, that may make it less likely you’ll miss or be late with a payment.

If you refinance federal loans with a private lender (in effect, turn your federal loans into a private loan), rest assured that credit bureaus don’t view these two types of loans any differently.

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7. Does It Hurt to Pay Off Student Loans Quickly?

Some people reason that because education debt is “good debt,” FICO must view it more favorably than other types of debt. And because credit scores can be improved by having open accounts that are paid on time, they think that paying off a student loan early might actually work against their score.

There’s no definitive answer to this question (remember: black box), but keep a few things to keep before buying into this belief.

First, FICO doesn’t see your student loan debt as good or bad. The agency doesn’t distinguish it from any other type of installment debt, such as mortgage or auto loan debt. Incidentally, while installment debt is different from revolving debt (like credit card debt), it’s generally best to have a positive track record with both types of loans.

Second, it’s true that FICO likes to see how you manage your debt. So, if you have an open account in good standing, that could help your score, but the impact would likely be small. And closing any account satisfactorily is generally a positive thing for your credit, so that could help your score, too.

Bottom line: Instead of worrying about how prematurely paying off your student loan could affect your credit score, consider the potential tradeoffs. For example, how much extra interest are you paying by leaving the account open? Also, a high loan balance may make it harder to qualify for new loans—something to think about when it comes time to buy a home.

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Notorious Big Bad D’s: Delinquent and in Default

The worst thing you can do is ignore your monthly loan payment. If you are even one day late with your payment, you’ll be considered delinquent and you’ll be charged a penalty for missing that payment.

Once a missed payment is more than 90 days delinquent, your loan servicer will report it to the three major national credit bureaus.

This could lower your credit score and hurt your ability to get a new credit card or qualify for a car loan or mortgage.

After 270 days of a missed student loan payment, your status changes to default and your student loans are due in full with any accrued interest, fines, and penalties.

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The Takeaway

Most student loan holders don’t love having that debt, but making steady, on-time payments helps build creditworthiness, which eases the way for future borrowing opportunities and attractive interest rates.

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