The 6 Most Powerful Ways Student Loans Affect Your Credit Score

Wondering whether student loans affect your credit scores? The short answer is yes. Understanding how federal and private student loans can harm or help your credit is essential, whether you’re a new borrower or have had student debt for years. 

The effects could be helpful or harmful, depending on several factors, including your payment history, credit mix, age of your credit, and more. Here are the different ways student loans affect your credit score, and how big of an impact they may have. 

Table of Contents

1. 1. Payment history 
2. 2. Credit mix
3. 3. Length of credit history
4. 4. Hard credit inquiries 
5. 5. Debt-to-income ratio
6. 6. Loan default consequences

1. Payment history 

Your payment history has the most significant impact on both your FICO score and VantageScore, common scoring models lenders use when assessing borrowers’ applications for financing. This history accounts for 35% of your FICO score and 41% of your VantageScore. 

As with other loans and credit lines, if you make on-time and full student loan payments, it could have a positive effect on your credit scores. If you miss payments or pay late, it could harm your credit scores. 

You’ll find several differences between how federal and private student loan payments generally work. With federal student loans, you aren’t required to make payments as long as you’re enrolled at least half-time at school and for six months following graduation. 

After that, you must make full monthly principal and interest payments. Some private student lenders let you defer payments until after graduation. For example, with our highest-rated private lender, College Ave, you can choose to make full principal and interest, interest-only, $25 flat, or no payments, while you’re in school.

2. Credit mix

Student loans will also impact your credit mix, which is an overview of the credit types you have. For instance, you might have student loans, a car loan, and a credit card. 

Your student loans are considered installment loans, meaning you make a monthly payment and repay your balance over a set term. Auto loans are another type of installment loan. By contrast, credit card debt is revolving debt, meaning you can pay it off and then spend against your credit line again. 

If you only have credit cards, adding student loans to your credit mix could help your credit scores. It diversifies your credit mix, which can be a good thing because it shows you’re capable of managing different types of payments. 

Your credit mix makes up 10% of your FICO score, while credit age and mix accounts for 20% of your VantageScore.

3. Length of credit history

The length of your credit history, or the age of your credit, also affects your credit score. And as far as lenders are concerned, the longer your credit history, the better. 

A long credit history lets lenders see how you’ve managed your debts over a long period, which could make you a lower-risk borrower provided that you’ve made on-time payments. The length of your credit history determines 15% of your FICO score, and credit age and mix makes up 20% of your VantageScore. 

Student loans could help you establish a long credit history, especially if you’re a new high school graduate, as these loans and your payments will appear on your credit reports. A long history of positive payments could make qualifying for future loans and credit lines easier.

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Tip

Credit utilization—the percentage of available revolving credit you’re using—is another factor affecting your credit score, accounting for 30% of your FICO score. Student loans don’t affect credit utilization because they’re installment loans, not revolving credit. 

4. Hard credit inquiries 

Hard credit inquiries, also called hard credit checks or pulls, happen when lenders check your credit while evaluating your application for financing. These inquiries typically cause your credit scores to drop by a few points. 

When you apply for federal student loans, which are issued through the U.S. government, you generally won’t be subject to a hard credit inquiry. (The one exception is Direct PLUS loans.) This is good news if you haven’t established any credit yet. 

Private student lenders conduct hard credit checks, so applying for multiple loans in a short period could lower your score by a few points. However, some lenders, including Earnest, our favorite for large loan amounts, allow you to prequalify without affecting your credit. Credible is an excellent marketplace that allows you to compare prequalified rates from multiple lenders.

Read More

What Credit Score Do You Need for Student Loans?

5. Debt-to-income ratio

Your debt-to-income (DTI) ratio represents your total monthly debt relative to your total monthly gross income. When you take on more debt, your DTI increases, as you’ll have a new monthly payment. Your new monthly student loan payments will factor into your DTI. 

Generally, lenders prefer a lower DTI, as it shows you can manage your monthly debt payments effectively based on your income. High student loan debt could affect your ability to qualify for additional credit in the future, including mortgages. 

Per Fannie Mae, the maximum total DTI for manually underwritten home loans is 36%, though some lenders may be willing to accept a DTI as high as 45% if you have excellent credit and a large down payment. 

Here’s a quick example of how student loans could affect a borrower’s DTI:

• Monthly income: $4,000
• Car payment: $500
• Credit card payments: $500
• DTI = 25%

If we add a $450 monthly student loan payment, the borrower’s DTI increases to 36%.

Read More

How Your Debt-to-Income Affects Student Loan Refinancing

6. Loan default consequences

Defaulting on your student loans will probably harm your credit. Typically, you’re considered in default on your federal student loans if you haven’t made a payment in 270 days, though you’re considered delinquent after 90 days. 

The timetable for defaulting on private student loans varies by lender, but you may be considered in default if you’ve missed three consecutive monthly payments. Delinquencies and defaults harm credit scores—with default causing more harm—and can stay on your credit reports for up to seven years. 

Student loan default can damage your credit and have other negative consequences, including garnished wages, accelerated repayment of your entire loan balance, withheld tax refunds (in the case of federal student loans), lawsuits, and loss of eligibility for federal student loan benefits such as forbearance and deferment. 

If you have mostly student loan debt and want to improve your credit score, the best strategy depends on what else is going on in your financial situation.

• For example, if you have a healthy income, we may recommend using your other credit cards for a small expense every month and paying it off.
• If you don’t have a credit card, we may recommend establishing a new card.

Regardless, having different types of credit looks favorable, and combined with a good payment history, this should lift your credit score soon after.

In the other case, where someone is already stretched thin with a high debt-to-income ratio, the primary focus is prioritizing paying down the student loan. This still looks favorable with a positive payment history, but it streamlines the focus on lowering the household debt.