How do student loans affect your credit score?

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Student loans contribute to your level of debt and cost you money in interest, potentially following you for up to a decade or longer. But that’s not all they do. How do student loans affect credit scores? A student loan can have both a positive and negative effect on your credit, depending on how you manage it. When you’re informed about your student loans, you can make sure you make the kinds of decisions that will boost your credit. 

How student loans can help your credit score

Each person’s credit score is made up of five factors, all of varying importance:

• Payment history (35 percent)
• Credit utilization (30 percent)
• Credit history length (15 percent)
• Credit mix (10 percent)
• New credit (10 percent)

Your payment history is the most significant factor of your credit score. This means that making payments on time and in full will help your credit score over time, which is especially important for the many college students who don’t have much else on their credit reports. The longer you’re consistent with your payments, the more positive payment history you build up. 

Additionally, student loans are installment loans, which helps with your credit mix. Many people only have credit cards, which isn’t enough to diversify their credit reports. The credit bureaus want to see that you can be responsible with all kinds of credit. And a student loan does just that. It brings more variety to your credit mix and shows you can responsibly pay your credit cards and student loans.

Lastly, student loans can age your profile. Many Americans don’t get a credit card when they’re 18, but they do get a student loan. Your credit history length will start from the first credit account, which might be a student loan for many people. 

However, note that for a student loan to affect your credit, it needs to be in your name. If a student loan is under the student’s parent’s name, it will only impact the parent. Alternatively, if parents have cosigned a student loan, it means the student loan can affect both parties’ scores (either positively or negatively). 

How student loans can hurt your credit score

Just as on-time payments can help your credit score, late and missed payments can hurt your credit score. Missing a payment even once can cause a dip in your credit score. 

Students should especially pay attention to when their repayment period starts. Repayment on federal student loans typically begins six months after graduation. The government gives students this six-month break before repayment to give them some time to find a job. In comparison, private student loans may require repayment starting the day the loan is taken out. Late and missed payments can impact your credit score as soon as a loan is in repayment status. 

If you ever miss a payment, it’s essential to pay it as soon as possible. Most lenders report a missed payment to the credit reporting agencies after 30 days have passed. If you’ve made a payment before the 30-day mark, there’s a possibility it won’t be reported and won’t impact your score at all.

If you’ve passed the 30-day mark, your lender will likely report it. Your credit score can then drop up to 90 points from a single missed payment. Additionally, a negative line item for the missed payment will be created and can stay on your report for up to seven years. That means this mistake can continue to impact you and keep your score down for many years. 

As soon as you miss a payment on your student loan, your loan is considered delinquent, and it will stay in delinquent status until you make the payment. If you continue to miss payments, your loan can transfer into default status. How long it takes for your loan to go into default depends on your lender, but it can range from 120 to 270 days. 

Once your loan is in default status, it’ll go through one of two different processes, depending on your lender. 

The government guarantees federal student loans. So when a federal student loan is in default, the lender can file a claim with the government to get their money back. If this happens, the status of the loan on your credit report will be “Government Claim,” which is a derogatory status. At this point, the government will typically open a new account and start attempting to collect the debt. 

If you have your loan with a private lender, it’s not guaranteed by the government. Instead, your private lender will likely write off the loan and sell it to a collection agency. The collection agency will start trying to contact you to collect payment on the debt. In this scenario, both the original loan and the collection loan will appear on your credit report. An account in collections is considered derogatory. 

In both of these situations, you’ll still have to pay the debt. Having a loan go into default doesn’t mean it’s forgiven.

And finally, every time you apply for a private or federal loan, the potential lender will probably request a hard inquiry into your credit. If you’re applying to several lenders, multiple hard inquiries may temporarily bring down your credit score. 

What to do if you can’t make your student loan payments

If you know you can’t make your student loan payments, you need to take action. Ignoring the problem will only deepen the consequences. If you’re worried about missing a payment, consider the following options:

• Federal loans may allow for deferment or forbearance, which is where you arrange to make lower payments or stop payments temporarily.
• Private loans allow borrowers to apply for a modified payment plan. This type of plan decreases the monthly payment by extending the loan term.
• Federal loans also offer income-driven repayment plans, so your payment aligns with what you make and is, therefore, affordable.

The good news is that none of these arrangements should affect your credit if you fulfill your end of the bargain. 

If you’ve already missed several payments on your federal loan, you can apply for the loan rehabilitation program. This program helps you catch up on your payments. And if you do so successfully, the program helps remove the default loan status from your credit report. 

How does paying off student loans affect your credit score?

When you pay off your student loans, there should be no real change in the long run. Initially, your credit score may temporarily go down because your credit mix goes down. However, if nothing else changes, your credit score will likely go back up in just a couple of months. But regardless of this minor dip, paying off your student loans is great for you in the long term. Being free of debt is always a good thing for your overall financial situation. 

Does refinancing student loans hurt your credit?

Many individuals consider refinancing their student loans at some point in their repayment journey, especially if they have multiple loans. When you refinance a loan, you find a new lender to give you a loan for the amount of all your loans combined. You can take this money and pay off all your lenders so you only have one large loan to contend with. 

There are a few benefits to refinancing. First, the lender is typically able to give you a lower interest rate than the average of all your outstanding loans. This can save a borrower thousands in interest over the life of their loan term. And second, having only one lender reduces the risk of missing or making late payments. 

But you have to be approved for refinancing—and this is where it can get tricky and potentially hurt your credit score. Lenders will want to evaluate your current credit standing before giving you this new loan. If you’re going through the process of refinancing, you’ll want to get the lowest interest rate possible, which means shopping around for the right lender. However, as we’ve mentioned previously, having multiple hard inquiries into your credit in a short period can significantly lower your score. 

Luckily, you can get around this by shopping the right way. Ask each lender you’re evaluating to give you their rate based on a soft inquiry (which doesn’t impact your score). Based on this information, you can identify your top lender and only let that one pull a hard inquiry. 

Find out how student loans are affecting your credit

Now that you understand how student loans affect credit scores, it’s important to stay on top of them. If you have student loans, make sure to check your credit reports and scores regularly. You’ll want to be up to date on what is and isn’t showing up on your reports and affecting your scores. Credit reports can have mistakes—and keeping an eye on your reports lets you address errors quickly. 

The number one rule with student loans is to always make payments on time and in full. If this isn’t possible, talk to your lender immediately. Explain that you can’t make your payments and ask them what options they have for you. 

If your student loans have already negatively impacted your credit, it’s not too late. You can work with CreditRepair.com to have your credit report examined by professionals. If there are any unfair or incorrect negative items on your report, we can help you find them and dispute them. Let CreditRepair.com help you today.

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Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.