By itself, taking out a student loan will not hurt your credit score. In fact, simply taking out a student loan will neither hurt nor benefit your credit score. How you handle your loan payments it what will impact your credit. If you miss a payment for any reason, that will hurt your score. On the other hand, consistent timely payments can help you build your score.
Here’s everything you need to know about the relationship between student loans and your credit score. But first, why is a good credit score so important and how is credit score calculated?
Importance of Good Credit
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A high credit score generally qualifies you for lower interest rates and better borrowing terms. This can make a considerable difference to the total cost of borrowing. Here’s why.
Your credit score is an indication of how responsible you are as a borrower. It tells lenders whether you can be trusted to return the borrowed money in a timely manner or are more likely to struggle with making the payments. This is the first thing lenders want to know before approving you for any type of loan, mortgage, or credit card.
A strong credit score indicates that you are a responsible borrower who makes all loan payments on time. With a high score, you can expect to get approved for a loan easily and you’ll get better terms and a lower interest rate too. On the other hand, a low score will make it more difficult to get approved for a loan or credit card. Even if you are approved, you can expect to pay a higher interest rate.
How Credit Score Is Calculated
TransUnion, Equifax, and Experian are the three credit bureaus who monitor and report your credit using the FICO® credit scoring model.
A FICO® score ranges from 300 to 850. A score of 300 is considered poor while a score of 850 is excellent. Your credit score is calculated using five distinct factors, with each factor accounting for a certain percentage of the total.
These are the five factors that go into calculating your credit score and the percentage each factor contributes to the total:
- Payment history: This is the largest factor that goes into calculating your score, accounting for as much as 35% of the total. Consistent timely payments will add points to your total score, steadily strengthening it over time. Missed payments can damage your score by a few points.
- Amounts owed: Amounts owed takes into consideration the total debt you owe in loans, mortgages, and credit cards against your total available credit. This accounts for 30% of your total score. Using a large percentage of your available credit regularly can lower your score as it could be a sign that you’re having financial issues and may find it difficult to pay back your debt.
- Length of credit history: Length of credit history accounts for 15% of your overall credit score. The longer you’ve had a credit line open, the more points it adds to your total. A longer credit history allows lenders to see how you’ve handled credit over a period of time.
- Credit Mix: This takes into consideration how many types of credit accounts you have and contributes 10% to your total score. Having a mix of credit accounts such as credit cards, student loans, vehicle loans, or mortgages can boost your score.
- New Credit: You may need a mix of credit accounts to boost your score. But, applying for multiple new credit lines within a short period of time can damage your credit. It can be a sign that you’re struggling financially and need more credit. This contributes 10% to your overall score.
How Do Student Loans Affect Your Credit Score?
As we said earlier, just taking out a student loan does not affect your credit score. It’s how you handle your student loan payments that will either hurt or boost your score.
When you take out a student loan, the lender reports it to the major credit bureaus and record the loan in your credit report. The loan payments that you make also get reported to the credit bureaus and are recorded in your credit report. The information in your credit report is then used to calculate your credit score.
Every loan payment that you make by the due date adds a few points to your credit score. On the other hand, a single late or missed payment will pull your score down by a few points.
Fortunately, late payments are not reported to the bureaus immediately. Most lenders will give you a few days to make good on the payment before reporting it. Federal student loan servicers typically report late payments after 90 days past the due date. That means you have about 90 days to make that payment before it impacts your credit score. Private lenders usually report late payments after 30 days past the due date.
Note: You may have 30 or 90 days to make the payment before it gets reported and affects your credit. However, you will still pay a late fee and interest on the late payment starting from day one past the due date until the payment is made in full. This is for both, federal and private student loans.
How To Use Student Loans To Boost Your Credit Score
Many students are too young to have a credit card or take loans before joining college. Taking student loans provides you with a great opportunity to start building credit.
The biggest factor that goes into building a strong credit score is making consistent timely payments. This can contribute as much as 35% to your overall score.
Generally, payments on student loans start 6 months from the graduation date. This is to give borrowers time to find a job and start earning a steady income so they can afford the monthly payments. Make a note of the monthly payment amounts, date of the first payment, and subsequent monthly due dates. Put a system in place for ensuring that you stay on top of the due dates.
If, after graduation, you do not get a job that pays well or you encounter some other financial problems, you must start exploring your options. Your goal should be to stay on top of your payments and not miss a single deadline.
These are some things you can do:
- If you have federal student loans, consider enrolling in an income-driven repayment (IDR) plan. There are several IDR plans that calculate your monthly payments based on your income, so they are always affordable. This will minimize the risk of missed payments and protect your credit score. Discuss your options with your loan servicer and choose a plan that works best for your circumstances.
- If you have private student loans, consider refinancing your loan to lower your monthly payments. While this will extend your loan term and increase the total interest that accrues, it will help protect your credit score. You can always refinance again and raise the monthly payments when your financial situation improves.
2 Ways That Taking Out Student Loans Boosts Your Credit Score Automatically
Two of the five factors that go into calculating your credit score are length of credit history and credit mix. Student loans help with both aspects.
Let’s assume you take out your first student loan when you start college. The moment you take the loan, it instantly starts your credit account. By the time you graduate, your credit history will already be 4 years old. The average age of your credit will become lower as you take new student loans every school year or every term. However, overall, you will benefit from the longer length of credit history.
Your school loan will also show up on your credit score and add to your credit mix, which can add another 10% to your overall score.
So, if you do in fact need students loans, they can help boost your credit and start your financial future on the right foot. The key to building and maintaining good credit is making loan payments on time consistently every month.
Are you looking for student loans? Use College Raptor’s new Student Loan Finder to discover personalized loans. Compare lenders and interest rates to find the ideal student loan for you!
Disclosure: FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.
| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.50%-16.12%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
 |
5.54% - 15.70% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
 |
4.63% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
 |
6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
|
|
5.66% - 14.72% Variable
3.69% - 14.56% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
 |
5.62% - 16.85% Variable
3.69% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
 |
5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
