- Student Loans And Your Credit Score: Qualifications And Impact
- What Credit Score Do You Need for a Federal Student Loan?
- What Credit Score Do You Need for a Private Student Loan?
- What Credit Score Do You Need to Refinance a Student Loan?
- How Student Loans Affect Your Credit Score
- Payment History
- Amount Owed
- Length of Credit History
- Credit Mix
- Ways Student Loans Can Hurt Your Credit
- Ways Student Loans Can Help Your Credit
- How Do Student Loans Affect Your Credit Score?
- If you pay late or skip a payment
- If you cannot pay your student loans
- Check your credit if your federal loan servicer is Great Lakes
- Does paying student loans build credit?
- How does refinancing student loans affect my credit?
- How credit scores affect new student loans
- How Student Loans and Paying Them Off Affect Your Credit Score
- Student Loans and Credit Score: The Direct Relationship
- Credit Benefits of Student Loans
- Credit Drawbacks of Student Loans
- I Paid Off a Loan…And My Credit Score Went Down?
- Student Loan Assistance
- Why Does Your Credit Score Take a Hit When You Pay Off Your Student Loans?
- Why Do Final Payments on Student Loans Affect Your Credit Score?
- How to Quickly Correct Your Credit Score
Student Loans And Your Credit Score: Qualifications And Impact
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Student loan debt is everywhere. Just over 14% of all consumers had student loans in 2019, and the average balance was around $35,000, according to an Experian study. While even some Americans in their 60s and 70s still carry student loan debt, you’re more ly to have a balance coming college—at the same time you might be trying to build your credit for the first time.
To make the most of your existing credit, it’s important to understand how your student loans and credit score will interact. If you play your cards right, student loan debt can actually give you a boost forward.
But if you mismanage your hand, it could end up hurting you.
No one wants to take out student loans—but if you have to, knowing how credit scores and student loans work together can allow you to make the best of the situation.
What Credit Score Do You Need for a Federal Student Loan?
In addition to helping build credit, federal student loans have several significant advantages over other borrowing options.
One of the most unique characteristics of federal student loans is that you don’t need a credit history to qualify.
This stands in stark contrast to other loan types that require a co-signer for applicants with bad—or nonexistent—credit. With federal student loans, you can start building credit right away, all on your own.
The only exception is with Grad PLUS loans or Parent PLUS loans, which may take your credit history into account. If your credit history is bad, you may need a co-signer (called an endorser in this case), or you can appeal the decision if you’re denied a loan.
Federal student loans also carry lower interest rates than many other credit building tools, credit cards and personal loans. They also come with more protections in case you run into trouble making your payments, and they can even be completely forgiven in some cases. This combination of features makes student loans an excellent way for responsible borrowers to build their credit.
What Credit Score Do You Need for a Private Student Loan?
Un federal student loans, where the Department of Education is your lender, the private student loan market is a bit more of the Wild West. Anyone can lend you money for college under the guise of a “private student loan,” and, as such, lenders vary widely.
Each private lender sets their own credit score requirements. However, as with all loans, your chances of getting a loan at a favorable interest rate are higher if you have good credit (670 or above, according to FICO).
Because most students don’t have any credit, borrowers typically need a co-signer to get private student loans.
The primary exception to this is borrowers who are going back to school as adults and have well-established credit.
According to one 2017 to 2018 survey from the Iowa Office of the Attorney General, just about all applicants except those with the worst credit (549 or lower) were able to get private student loans. However, loan costs varied widely, and even those with the best credit scores could expect to pay an interest rate from 3% to 12.875%.
That’s why it pays to shop around. Each time a lender runs a hard credit check it can temporarily damage your score. But if you do all of your rate shopping within a 30-day period, it’ll be treated as a single credit pull, thereby limiting the damage to your score.
What Credit Score Do You Need to Refinance a Student Loan?
When you refinance a student loan, you’re essentially replacing your current student loan (whether federal or private) with a private student loan. That’s because you can’t refinance federal student loans; you can only consolidate them into a single loan.
Because refinancing your loan means taking out a new private student loan, the rules about credit are generally the same. The higher your credit score, the better your odds of being approved for a good rate. Every lender is different so there’s no one credit score you need to refinance your loans. But again, if your credit isn’t good, you may need a co-signer to help you qualify.
How Student Loans Affect Your Credit Score
Once you have student loans in your name, they can impact your finances in a few different ways. Here are the most common ways in which student loans affect your credit score.
The largest factor in determining your credit score is your payment history—i.e., how consistently you make on-time payments. This factor alone makes up about 35% of your credit score.
Once you start making payments on your student loans, each payment (or lack of payment) will be recorded on your credit report. If you always pay on time (hint: sign up for autopay), this may help boost your score over time.
But if you pay late—or default—it can harm your credit score. Paying a few days or even weeks late may not ding your credit score, although you probably will be charged a late fee.
Generally, lenders will report your late payment to the credit bureau once it’s 30 days past due—and each month thereafter until it’s paid.
Each additional late payment on your credit report drops your score even further and stays on your credit report for seven years before falling off.
The amount of money you owe on your debt generally has the second-largest impact on credit, making up about 30% of your score. However, your revolving debt from things credit cards generally impact your credit utilization the most because FICO’s algorithm generally rates these types of debt as more important.
It’s possible that the same balance on a credit card would hurt your score more than the same amount in student loans, although it depends on other factors such as your payment history and how high your balances are. For example, if you have $35,000 in student loans, the debt ly won’t be as impactful as if you max out $35,000 in credit card limits.
One thing your student loan balance does affect is your debt-to-income ratio. This doesn’t really factor into your credit score, but it does impact whether lenders are ly to approve you for future loans credit cards and mortgages. If your student loan payments take out a big chunk of your income, it might be harder to access other types of loans in the future.
Length of Credit History
Lenders to see that you can manage your debt over a long period of time, not just as a short term IOU. To account for this, the length of your credit history makes up about 15% of your credit score.
Most people take 10 years or more to pay off their student loans if they only make the minimum payments. No one wants to be in debt that long, but you can at least use the time to build up a long credit history.
Similarly, lenders to see that you can manage the different types of debt available to you, including both installment loans and revolving credit. Credit mix makes up about 10% of your credit score.
By having student loans, you’re showing potential lenders that you can manage and repay installment loans. Similarly, applying for and paying down a credit card can boost your score by demonstrating your experience with revolving credit.
Ways Student Loans Can Hurt Your Credit
Here are the things to watch out for if you have student loans:
- Late payments. Making a payment late or defaulting on the loan is the biggest way student loans can harm your score.
- Applying for a private student loan. Lenders do a hard credit check when you apply for a loan, which can have a small negative effect on your score for a few months.
- Carrying a large student loan balance. Borrowing a lot of money can have a negative impact on your score. It can also negatively affect your debt-to-income ratio by increasing your outstanding debt.
- Paying off your loan. Paradoxically, paying off your student loan can sometimes drop your credit score, but this effect is usually temporary. This might be more ly to happen if your student loan is the only installment loan you have, for example.
Ways Student Loans Can Help Your Credit
It’s always better to not owe any debt, but if you need student loans to get through school (and many of us do), they can at least help you build your credit. Follow these tips to boost your credit using student loans:
- Establish a good payment history. Make all of your payments on time, and you could be rewarded with a better credit score. Signing up for autopay makes this easier so you don’t have to consciously think about payments.
- Build a good credit mix. Installment loans—along with revolving credit a credit card—can help show creditors you’re good at handling both types of debt and may ultimately increase your score.
- Lengthen your credit history. Lenders also consider how long you’ve been managing debt. For this reason, paying off your debt responsibly for many years can help raise your score.
- Skip the co-signer. This one won’t really affect your credit score. But if you take out a federal student loan without a co-signer, you won’t risk messing up a friend or family member’s credit if you miss a payment or default.
How Do Student Loans Affect Your Credit Score?
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Student loans affect your credit in much the same way other loans do — pay as agreed and it’s good for your credit; pay late, and it could hurt it. Student loans, though, may give you extra time to pay before you are reported late.
Student loans are generally installment loans — you pay a specified amount for a certain time period. The lender reports this to credit bureaus, and you begin to establish a track record.
You have a right to see the information the credit bureaus keep. You can check all three major bureaus’ reports weekly during the pandemic for free, and you can check a free credit report from TransUnion through NerdWallet as often as you . That one updates weekly.
If you pay on time, every time, you'll begin to establish a solid record of managing credit.
Here’s what you need to know about how student loans can affect your credit score.
If you pay late or skip a payment
Forgetfulness happens, and a brief bout won’t impact your credit. Your score will start to drop only after your lender reports your late payment to one or — more ly — all of the three major credit bureaus.
How long before it’s reported depends on the type of loan you have:
- Federal student loans: Servicers wait at least 90 days to report late payments.
- Private student loans: Lenders can report them after 30 days.
However, lenders can charge late fees as soon as you miss a payment.
If your lender does report your late payment, also known as a delinquency, it will stay on your credit report for seven years.
The more overdue your payment, the worse the damage to your credit. For instance, your federal student loan will go into default if you don’t make a payment for 270 days. That will hurt your credit even more than a 30- or 90-day delinquency.
If you cannot pay your student loans
Sometimes money gets tight. In those situations, ask your lender about lowering or pausing your monthly student loan payments. You might be able to:
Changing the terms of your loan does not hurt your credit. As long as you handle payments as agreed — even if that means paying $0 per month — your credit score shouldn’t suffer.
Check your credit if your federal loan servicer is Great Lakes
The borrowers’ paused payments may have been reported as “deferred” as a result of a coding error. The paused payments should have been reported as if the borrower had made them. If the borrower was current when forbearance began, for example, the status should be “current.”
Deferred status is not a scoring factor under FICO credit scoring formulas, the ones most commonly used to make lending decisions. But deferred status can lower the credit scores generated by VantageScore formulas — the scores most commonly offered for free to consumers as a way to track their credit history.
Great Lakes says it is working with credit reporting agencies to correct the inaccuracies. Once the information on the underlying credit report is correct, credit scores should be unaffected.
Borrowers should check their credit reports from each of the three credit reporting bureaus at AnnualCreditReport.com, the free, government-run website.
Great Lakes asks that borrowers contact it directly if their credit reports are incorrect. Call 800-236-4300. Get more information on contacting Great Lakes customer service or making a complaint here.
Does paying student loans build credit?
If you've used only one type of credit before, a credit card, then having a student loan is good for your score because it helps your credit mix. But that's a smaller score factor, so it's not worth taking out a loan you can't afford just to have a mix of credit types.
Student loans taken out by parents, such as federal parent PLUS loans and private parent loans, affect only the credit of the person who took them out.
So if a parent takes out a federal parent PLUS loan, for instance, to help you pay for school, it affects their credit.
A student loan you took out and your parent co-signed, on the other hand, appears on both of your credit files and can affect scores for both of you.
How does refinancing student loans affect my credit?
It’s smart to shop around for the lowest rate before refinancing student loans, especially if you can do it without dinging your credit. Either of the following options will keep you from having multiple hard inquiries on your credit report.
- Apply for all the loans you’re comparing within a 14-day period. Under the FICO credit scoring model, multiple hard inquiries of the same type — such as student loan inquiries — count as a single inquiry if they happen within a short period. Various versions of the credit scoring model specify different time frames — including 14, 30 and 45 days — but you’ll be covered under all of them if you submit all your applications within 14 days.
- Get rate estimates through lenders’ pre-qualification processes. Some lenders let you get a rate estimate that won’t affect your credit.
How credit scores affect new student loans
All of your student loans can affect your credit. But you don’t need good credit to take out a student loan in the first place.
- For federal loans: Most types of federal student loans, including all federal loans for undergraduates, don’t require a credit check. Federal direct PLUS loans, available to parents and graduate students, do require one. However, your credit score won’t affect your rate; all PLUS loans disbursed in the same year have the same rate.
- For private loans: Private loans require that at least one borrower have good credit. The lender will perform a credit check to determine whether you qualify for the loan. The higher your credit score, the lower the interest rate you’ll ly receive. Often, undergraduate students need a co-signer to qualify for private student loans.
How Student Loans and Paying Them Off Affect Your Credit Score
Student loan debt is becoming almost commonplace in America.
According to the Student Loan Report, approximately 70 percent of college students in 2018 have student loans, with an average of $27,975 in debt per borrower.
I’m not going to go further into the statistics; the more important topic to discuss is the impact that these loans have on each and every borrower, including the potentially surprising outcome of paying off a loan.
Student Loans and Credit Score: The Direct Relationship
A student loan – or any loan, for that matter – directly affects your credit score the loan amount, the terms of the loan and payments made. The good news is that taking out student loans usually increases a borrower’s credit score – at least in the short term.
The reason is that Fair Isaac Corporation (FICO, the most widely used credit score provider in the U.S.), is believed to view installment loans more favorably than revolving debt. The expectation in a student loan is that the balance will start high and be paid down to zero, whereas credit card debt starts with zero, rises and fluctuates.
All student loans, whether private or federal, are treated the same way in your credit score.
Credit Benefits of Student Loans
Whether a student loan helps or hurts your credit is largely dependent on if you make payments in full, on time, all the time. Payment history accounts for 35 percent of your FICO score. While a late payment or two won’t destroy your credit beyond repair, it can certainly cause a noticeable plunge. A single missed payment could potentially lower your credit score by up to 100 points.
When managed properly, student loans can be advantageous in helping to build your credit history.
We’re certainly not saying you should use this as a strategy to improve your credit score; what we mean is that if you require financial assistance to attend school and are responsible with repayment, student loans are not the credit killers you might fear them to be.
Your credit score itself might be a little confusing to dissect, but the concept of building credit is pretty straightforward: Lenders when borrowers have a track record of on-time payments, which leads to other lenders approving loans, which leads to rising credit.
Additionally, having student loans along with other types of loans, such as an auto loan or a mortgage, can positively impact your credit mix. In a credit report, the credit mix represents the different types of accounts the consumer has open. Credit mix only accounts for 10 percent of your FICO score – a much smaller portion than payment history, but still notable.
Credit Drawbacks of Student Loans
If student loan payments are inconsistent and/or late, they will quickly start to weigh down your credit score. Remember, payment history alone determines 35 percent of your score.
Late payments and delinquencies can be very difficult to overcome. Defaulting, of course, is even worse.
Having high student loan balances can also make it more difficult to qualify for other types of loans that consider debt-to-income ratio.
One of the lesser-known ways that student loans can negatively affect credit is when a borrower shops around for private loans. This generates many credit inquiries from different lenders, which can take off a few points each from your credit score. It is only a short-term impact, however, and is not considered to be a major concern.
I Paid Off a Loan…And My Credit Score Went Down?
Now, let’s talk about the ly reason you landed on this article. Paying off loans is a good thing, so you would think that doing so would result in a pat on the back and a bump up in your credit score – but that’s not always the case. Oftentimes, borrowers see their credit scores drop after paying off a loan. This can happen for several reasons:
First, closing a loan account shifts the dynamics of the borrower’s financial picture. If there is not a lot of credit history outside of the loan that has now been paid off, the borrower loses their main driver of credit history. Even with all of those on-time payments on the loan, the credit history appears shorter. A shorter credit history typically means a lower credit score.
Second, paying off a loan can result in a lower credit score if the borrower is left with primarily revolving debt such as credit cards. Remember that X factor, credit mix, that we mentioned? This is where it can really make a difference.
Lastly, if you had any missed payments, but then managed to completely repay the loan shortly after, you could be seeing the two impacts above along with the previous (and potentially significant) impacts of the missed payments.
Paying off a student loan will affect each borrower differently. It is very common to see a temporary dip in your credit score after closing a loan account, so don’t panic if this happens to you. Repaying a loan is always an accomplishment that improves your overall financial standing and future.
Student Loan Assistance
You will notice that we specifically stayed away from all of the gloom-and-doom accounts of student loans in America. That’s because we believe in focusing our energy on guiding students and graduates to better finances through nonprofit student loan counseling to help you find and follow your path to becoming debt-free.
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovate ways to motivate and educate community members and students about financial literacy.
Melinda joined credit.org in 2003 and has over 19 years experience in the industry. Credit.
org is a nonprofit financial counseling agency specializing in Debt Management Plans and helping people get debt.
Why Does Your Credit Score Take a Hit When You Pay Off Your Student Loans?
This was written by Olivia Kendall, a client happiness team lead at Earnest.
I just paid off all of my student loans — and my FICO took a huge, 40-point hit! What gives? I thought paying down my debt as quickly as possible (while still contributing regularly to an emergency fund) was the responsible thing to do? Shouldn’t my score go UP by 40 points when I prove I’m a low credit risk by paying my loans in full, earlier than expected?
Sleepless in San Francisco
Congratulations on completing your student loan payments! No matter what’s happened to your FICO score, that’s a huge accomplishment and not needing to make those monthly payments will free up more of your income to do things invest, save, or treat yourself.
The TL;DR answer to “Shouldn’t my score go up when I pay off my student loan debt?” is: Not necessarily. Here’s why.
Why Do Final Payments on Student Loans Affect Your Credit Score?
When you pay off a loan and then close the related account, it can impact your FICO score in a couple of ways. (A quick refresher on your FICO score: The formula major credit bureaus use to calculate this number has multiple factors, including credit utilization, the length of credit history, payment history, and credit mix.)
First, when you close a revolving account ( a credit card) it can affect your credit utilization ratio or the amount of revolving debt you have relative to the available credit you have. If you close an unused $0 balance credit card, your utilization ratio will increase. And that could negatively impact your FICO score.
Next, the closure of an account could zap the repayment history associated with that account. A long history of on-time repayment helps build your credit—but if you close that account, there goes its history with it. That could also negatively impact your score.
Third, when you close your student loan accounts, which are considered installment loans, and have only revolving credit remaining ( your credit card) or no other credit at all remaining—your credit mix will change. This could also negatively affect your FICO score. You could have federal student loans or private student loans, repaying your full loan balance will close your account with the servicer and impact your credit.
The more credit history you have, the less your FICO will be impacted by singular events closing an account.
Learn more: How to Read Your Credit Report
How to Quickly Correct Your Credit Score
If your good credit score did take a hit, and you’re looking to build it back up in a short period of time, you might consider using a credit card or other types of credit in a responsible way as a way to boost your good credit. The best way to accomplish this is to always pay off your balance in full each month, and keep the account open even if you’re not using it every month.
Showing that you can sensibly manage both installment debt ( a student loan or auto loan) and revolving ( a credit card) is a factor in your overall score. This can help with improving your credit mix.
If your credit file is relatively thin (i.e.
, if there are not a lot of items in it either because you are new to credit or you don’t utilize it as part of your financial strategy) then credit mix is even more important.
Going forward, know that showing lenders that you’re both predictable and responsible is sometimes more advantageous than just showing that you’re responsible, at least from the perspective of FICO scoring.
Lastly, one more thing to be prepared for when closing an account is the potential for fees. In the world of lending companies, whenever a borrower pays off their loan before the repayment plan term is due, it’s considered a “prepayment.
” One reason many loan servicers don’t prepayment is that it makes it harder to track and manage loans. In fact, many traditional lenders discourage people from doing this by imposing an additional fee if they pay off their loan before the due date.
(Note: Earnest never charges fees for extra payments or paying off a loan.)
What are the best things you can do to ensure your credit score improves over time so lenders can offer you lower interest rates? Be attentive to your personal finances and bank account, ask questions, stay in good standing with your lenders, and make sure you truly understand the terms of any new loan or line of credit.
Special thanks to John Davidson, an underwriter at Earnest, for his contributions to this piece.
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