Understanding the Effect of Student Loans on Credit Score

If you took out loans to pay for your education, you might be concerned about how student loans affect credit scores.

It’s true that student loans can impact your credit. However, responsible management of student loans can actually help you build your credit, while mismanaging loans can harm it. Furthermore, federal and private student loans impact credit in different ways.

So, exactly how do student loans affect credit scores? 

The financial experts at Tower Loan explain the connection between student loans and credit scores to help you become a responsible borrower and improve your purchasing power.

How Student Loans Impact Your Credit Score

Can student loans hurt your credit? Here are five ways your educational loans could impact your credit score positively and negatively.

1. Payment History: The Most Important Factor

If you make timely payments on your student loans, you can improve your credit score over time. However, missed or late student loan payments can stay on your credit report for seven years.

You typically have 90 days for federal student loans until late payments are reported. However, lenders often report late payments on private student loans as soon as 30 days after you miss a payment.

Federal student loans default if you don’t make payments for 270 days. However, after just 90 days, private loans typically default and cause significant damage to your credit.

2. Credit History Length: How Student Loans Help Build It

The effect of student loans on credit score can be positive, especially regarding credit history length. Student loans contribute to a more extended credit history, showing lenders your reliability in making payments and benefitting your credit score.

Many young borrowers in their late teens and early 20s can establish their credit through student loans and set themselves on a path toward financial stability.

3. Credit Mix: A Positive Impact

Another positive way student loans affect credit scores is diversifying your credit mix. Lenders like to see a mix of various credit types, such as revolving credit and installment loans. Student loans can add to this mix and diversify your credit profile. However, keep in mind that credit mix is a lesser factor to lenders than payment and credit histories.

4. Amounts Owed: Managing Student Loan Debt Wisely

Managing your student loan debt while considering the impacts of high balances and your debt-to-income ratio is crucial.

It is best to keep balances to maintain a good credit score and utilization, which is the calculation of credit you use compared to your total available credit. Meanwhile, lenders look at your debt-to-income ratio to assess your ability to repay a loan, so if your ratio isn’t favorable due to student loan debt, this could impact your ability to get another loan.

Paying down student loan debt gradually also has benefits, including greater flexibility in case one’s income or other financial goals change.

5. New Credit Applications: The Impact of Hard Inquiries

Student loan applications require hard credit checks, which can slightly and temporarily lower your credit score. Many federal student loans for undergraduates don’t require credit checks, but federal direct PLUS loans for parents and graduate students do.

Private lenders typically check credit before offering student loans, yet some may offer soft credit checks if you pre-qualify for a loan. This is a benefit because soft credit checks don’t impact your credit score but still allow you to compare interest rates.

Consider shopping around for private loans within a 14-day grace period to minimize the impact of hard inquiries that affect your credit.

How to Protect Your Credit Score If You’re Struggling With Payments

If you’re finding it challenging to make federal student loan payments on time, income-driven repayment plans and deferment and forbearance options are available. You can get your loan payments reduced based on your income or enroll in a program to temporarily pause your monthly payment obligations.

For private student loans, your options include refinancing, modified payment plans, and lender hardship programs. Regardless of your loan type, it’s crucial to communicate with your lender about financial hardships to work out a mutually agreeable solution before missing payments.

Does Paying Student Loans Build Credit?

Does a student loan affect credit rating in a beneficial way to build credit?

Yes, because consistent payments establish a positive credit history and prove your creditworthiness to lenders. Timely student loan payments can impact your future borrowing ability in both positive and negative ways.

However, remember that student loans only affect the credit of the person who took out the loan. If a parent takes out a loan on behalf of their child, the student, only the parent’s credit is impacted. Having a parent co-sign a student loan with you as a student will impact both of your credit scores.

How Refinancing Student Loans Affects Your Credit Score

Some people refinance their student loans to get better interest rates. However, shopping around can result in multiple hard credit check inquiries and knock a few points off your credit score.

To minimize this impact, do your rate shopping within a 14-day window and take advantage of pre-qualification offers. Refinancing can have long-term benefits if it offers lower monthly payments and interest rates.

How Credit Scores Affect Your Ability to Borrow New Student Loans

Does student loan debt affect your credit score and your ability to take out a new student loan?

Your current credit score won’t affect your interest rate on a federal direct PLUS loan because they have the same rate in any given year.

However, having good credit to get a private loan is more critical than with a federal loan. Higher credit scores result in lower interest rates for student borrowers. As an undergraduate student, you might consider getting a co-signer with good credit to help you qualify for better private student loan rates.

Contact Tower Loan for Further Financial Assistance

We hope you now understand the answer to “Do student loans affect credit score?” and how federal and private student loans impact your credit. All student loans have the potential to affect your credit score; however, that effect can be positive if you manage your student loan debt well and make on-time payments.

If you have further questions about how student loans affect credit scores or how a personal installment loan can help you pay for your education, please contact Tower Loan. You can apply for our online loans from the comfort of your home or visit a local branch near you to get the funding you need quickly and conveniently.