How Student Loans Affect Your Credit (Hint: It's Not All Bad)

It really comes down to how you manage your debt.

Whether you just signed the dotted line on your first student loan or have been paying off college debt for years, those loans have a big impact on your credit.

That’s right: As if fitting student loan payments into your budget, navigating repayment plans and dealing with your servicer weren’t complicated enough, you also have to ensure that your loans don’t tank your credit score.

Having good credit is key to living your best post-grad life. It affects everything from renting an apartment to getting your own cellphone plan and even landing a job.

So here are the many ways your student loans can affect your credit ― and what you can do to make sure it’s all good.

The Good ...

You establish a credit history early.

As a college student, you probably don’t have much experience managing credit. Maybe you took out a student credit card or got an auto loan to buy a car. But you likely have zero previous loans to your name. And while that might seem like a good thing, it can actually harm your credit.

About 15 percent of your FICO credit score is weighted according to your credit history. Lenders and other creditors like to see that you have lots of experience borrowing and paying back money, so the longer your credit history, the better.

By obtaining student loans as a young adult, you get a head start on building that credit history. Of course, taking on debt just for the sake of building your credit history doesn’t make a whole lot of sense. But if you need to borrow the money anyway, it’s an added benefit.

Student loans diversify your credit mix.

In addition to a long history of managing credit, credit scores also factor in experience with different types of credit. In fact, your “credit mix” makes up 10 percent of your score.

“It’s good from a credit mix standpoint to have credit cards, a car loan, a mortgage and a student loan in your credit portfolio,” said Mike Pearson, founder of the financial advice site Credit Takeoff.

By paying off a student loan, you show that you’re capable of managing installment credit ― the term for a fixed-payment loan that requires regular monthly payments until it’s paid back. Later, you can diversify with other types of installment credit as well as revolving credit ― that’s the type that you regularly borrow against and pay back (think credit cards). The more types of credit you use, the better your credit score will be.

Paying on time does wonders for your score.

While a long, diverse credit history is good, a strong track record of paying all your bills on time is by far the best thing you can do for your credit. Payment history is the most heavily weighted factor in calculating your credit score, accounting for 35 percent.

“If you’re making your loan payments on time every month, this consistent payment history will boost your credit score,” Pearson said. “So on-time student loan payments can really help.”

The Bad …

Missing even one loan payment can wreck your credit.

While making your payments on time is great for your credit score, missing payments spells big trouble. “Just as making on-time payments will help boost your score, making late payments on your student loans will lower it,” Pearson said.

And with payment history making up 35 percent of that score, just one late or missed payment can have a dramatic impact.

According to FICO data reported by Equifax, a person who has a credit score of 780 and has never missed a payment before could see their score drop by as many as 90 to 110 points for being overdue by 30 days. And the longer that bill goes unpaid, the worse it is for your score. A payment that’s 90 days late can have an even bigger negative impact. Also, the more recent the late payment, the more negative of an impact it could have.

Defaulting on student loans is even worse.

If you let student loans go unpaid for too long, you could end up in default. That’s when your payments are more than 270 days late. When that happens, the entire student loan balance becomes due immediately ― and your credit takes a big hit.

“If you ever default on your student loan, it will get sent to collections and appear on your credit as such, greatly damaging your score,” Pearson said. “A collection will stay on your credit reports for seven years.”

A high loan balance can also bring your score down.

Even if you stay on top of your student loan payments, having that debt could bring down your score ― at least temporarily.

Another important factor in assessing credit scores is “amounts owed,” which makes up 30 percent of your total score. Amounts owed is defined as the total amount of debt you owe in comparison to the total amount of credit available to you. For example, if you took out a student loan of $50,000 and you have $40,000 left to pay off, you owe 80 percent of the original loan.

Owing a lot of debt can also make it tougher to get approved for new credit. When you apply for a loan, lenders usually consider your debt-to-income ratio, which is the percent of your total monthly income that’s allocated to debt repayment. If your DTI is too high, you could get denied.

Fortunately, when it comes to your credit score, the credit bureaus tend to treat installment loans more favorably than revolving credit. And as you pay down the balance of those loans, the negative impact on your credit will diminish.

Managing Your Student Loans For Good Credit

So how can you make sure your student loans help ― not hurt ― your credit? “The key takeaway here is that it’s not necessarily the student loan itself that’s ‘good’ or ‘bad’ for your credit, but your behavior in handling the loan and your ability to pay it back on time,” Pearson said.

Depending on your situation, here are a few things you can do to prevent your student loan debt from harming your credit.

Automate payments: Since paying your loans in full and on time is the most important thing to do, it might be a good idea to set those payments on autopilot. “Set up autopay so you don’t forget to make monthly payments,” suggested Teddy Nykiel, student loan expert for the personal finance site NerdWallet. “As an extra incentive, many lenders and servicers offer a small interest rate discount for signing up for autopay.”

Just be sure to keep a buffer of cash in your bank account ― otherwise you could end up overdrafting.

Pay down your debt aggressively: The faster you pay off your student loans, the faster you’ll see the positive effects on your credit. Not to mention, you’ll have more money to spend on the things you want.

There are many ways to pay off loans faster or even have them forgiven. At the very least, pay more than the minimum when you can. “If you choose to put more money towards your loans every month, you will end up paying less in interest over the life of your loan and get out of debt faster,” said David Green, chief product officer at online lender Earnest.

Look into income-driven repayment: On the other hand, if you’re struggling to keep up with your monthly payments, there are other options. “If you can’t afford your federal student loan payments, switch to an income-driven repayment plan,” Nykiel said. An IDR plan will cap payments at 10 to 20 percent of your income and extend the term to 20 to 25 years, depending on the specific plan. “If your income is low enough, you could owe as little as $0 a month without harming your credit,” Nykiel said.

One thing to keep in mind is that while they’re great for making monthly payments more affordable, income-driven plans can also increase the total amount of interest you end up paying. Plus, you’ll maintain a higher balance since you’ll be paying off the loan more slowly. But if IDR keeps you from missing payments, it’s probably worth it.

Rehab your student loans: If you are in student loan default, all is not lost. Federal student loan borrowers have the option to enroll in student loan rehabilitation.

To rehab your student loans, you work with your servicer to come up with a new payment plan that you can afford. Then you need to make nine on-time payments within a 10-month period. If you do that, you’re back in good standing. The best part? The default is removed from your credit reports (although late payments leading up to the default will still be there).

Consider refinancing: Unfortunately, borrowers with private student loans don’t have the option to enroll in IDR, federal forgiveness programs or other federally backed student loan benefits. However, if you have good credit and solid income, you might qualify to refinance your loans.

By refinancing, you can qualify for a lower interest rate. That saves money on interest ― maybe a lot more than you’d think. Because more of your money can go to paying down the principal of the loan, it also means you may be able to pay off your debt faster. Green warns that refinancing could temporarily knock a few points off your credit score since it requires a hard credit inquiry, “but it will come back after a few months of on-time payments.”

Since student loans can only be refinanced through private lenders, use caution if you’re considering refinancing federal loans. Doing so will permanently forfeit the protections and benefits available to federal borrowers. In that case, it’s only a good idea if you have high interest rates and no worries about affording payments down the road.

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