Student loans have the same effect on your credit score that other lending types like credit cards, auto loans, or mortgages hold. Like any other lending form reported on your credit report, your credit score can fluctuate based on your student loan repayment habits.
Your credit score is calculated using five components:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- Credit mix: 10 percent
- New credit: 10 percent
Student loans can help you establish a credit history, which can be a big asset down the road. It’s good news if you can show that your credit history started when you began college, versus establishing it at age 26 if you never took out student loans. The longer your credit history is and the higher your score, the less impact a few missed payments (on anything) will have.
Student Loan Payment History
Payment history makes up the largest chunk of your credit score, which is why paying back loans on time makes such a difference. Consistently making your student loan payments on time helps increase your credit score.
If you fail to make student loan payments on time, expect to see a decrease in your credit score. The damage done to your score will depend on other debts you have and your payment history with them.
Suppose you have student loans, a credit card and a car loan. You’re making timely payments on the credit card and car loan but not the student loans. In this scenario, your credit score is harmed, but not as much as if you only have student loans and are not paying them back.
How Student Loans Improve Your Credit Mix
Of course, some college graduates have more of a credit mix with credit cards and car loans. Some may even already be making mortgage payments. In any case, timely payments on student loans, other types of loans and credit cards are good for your credit score.
How Student Loans Impact Amount Owed
As for amounts owed, student loans are installment loans as opposed to revolving loans such as credit cards. The less you have to pay on a student loan, the better. This portion of your credit score helps you more five years into repayment than right at the beginning.
How To Repay Student Loans On Time
Making student loan payments on time may not always seem possible, but missing payments hurts your credit score. For federally backed loans, take advantage of the various repayment plans rather than regularly skipping payments. For instance, an income-based repayment plan considers your household size and amount of income. Meanwhile, a graduated plan has you making lower payments at first, and they increase gradually. As long as you make your payments on time, no matter the plan, your credit score should not be hurt.
The situation is trickier for private student loans. However, you can explore refinancing or consolidation options. You can with federally backed loans too.
How Refinancing or Consolidating Student Loans Affects Credit
There could come a time when you want to refinance or consolidate your student loans, especially if your interest rate will drop significantly. Refinancing or consolidating can also:
- Streamline payments so you are paying only one entity.
- Lower your monthly payments (although increasing them overall and extending your payment period).
- Get you a predictable, fixed interest rate.
There are sound reasons to consolidate some loans and not others. For example, if you will lose valuable benefits on one loan such as rebates on principal, you might want to skip consolidating that specific loan.
Regardless of how many student loans you consolidate or refinance, there could be a direct effect on your credit score. That’s because hard credit inquiries pull your score down. The impact is minimal if you’ve applied for refinancing or consolidation with only one company, but if you’ve applied to many, the cumulative effect can be great. Your score could even drop by 20 to 50 points, depending on the number of applications and how recent they have been.
Of course, consolidating or refinancing your loans can make them more affordable to pay. When you make on-time payments, your credit score goes up.