- Student loans are installment loans, but they differ from traditional types of installment debt in several important ways.
- On-time payments — not balances — may have the biggest influence on how your student loans affect your credit score.
- Student loans can favorably impact your credit score by broadening your credit mix and bolstering your payment history.
Student loans can affect your credit score in various ways, some of which may surprise you. Ahead, we’ll dive into the details of how they differ from common forms of debt and how you can use them to improve your credit score.
How Do Student Loans Affect Credit Score?
Student loans impact nearly every factor of your credit score. Here is a breakdown of the key nuances you need to understand.
Payment history is the most important part of a credit score, making up about 35% of FICO scores — the most of any factor. So, the biggest connection between student loans and credit scores involves student loan repayment — whether you’re making monthly payments on-time and in-full.
What’s more, the influence of payment history on your credit score goes both ways. While paying on-time every month goes a long way toward building a great score, failing to make scheduled payments can lower it. This is especially true if you have multiple loans that are all billed together. Say you currently have four loans but make a single monthly payment covering all of them. If you make a payment late, it’s viewed as missing four payments in your credit report, making it look as though there are four accounts past due — which could have a negative impact on your score. As noted before with federal loans, you have 90 days to get caught up before late payments or missed payments hurt your score.
Amounts owed is another key factor, determining about 30% of a FICO score. In addition to the overall amounts you owe, credit scoring also considers the amount you owe on specific types of accounts, including installment loans. The utilization rate of loans is also part of this factor.
What is a loan utilization rate? It’s the balance of each loan divided by the original loan amount. This is where deferment can be a little harmful because loans that were deferred during school increase in balance and may have a utilization rate over 100%. Our research has shown that this typically corresponds to lower credit scores. As you pay down student loans, the lower balance can help your scores by reducing overall outstanding debt and loan utilization.
A smaller but valuable part of your credit score (accounting for about 10%) gauges your credit mix, or the different types of lines of credit and loans you have. Having a student loan on your credit report (installment account) and a credit card (revolving credit) — and managing both types well — can have a positive impact on your credit score.
Age of credit
The age of your credit accounts is the other major factor of a credit report that is affected by student loans, largely because they often have long repayment periods.
Length of credit history includes the age of your oldest account, the age of your newest account and the average age of all your accounts. While you are in college, the age of your loan will be fairly new, but as you make payments over time, this age goes up.
For example, say you take out a loan every semester for college and then repay on a typical 10-year repayment plan. After just a few years of payments, your oldest account will be well over five years old, and the average of these accounts will exceed three years. This is considered a healthy credit history in both cases and can really help keep your credit score on solid ground because a longer credit history has a positive impact on credit scores.
Enhancing Your Credit Score as a Student Loan Borrower
Getting a college education requires an ever-growing financial commitment, and 4 in 10 people who went to college said they took on at least some level of debt for their education, according to the latest data from the Federal Reserve. Being aware of the key factors that could make the positive credit-building aspects of student loans either more or less influential can help better position you to manage them wisely — so that they contribute positively to your credit score.