Student Loan Debt & Credit Scores

How you manage your student loan debt will determine how your credit score is impacted over time. 

student loan debt

Credit scores affect people's lives in many ways, including how likely you are to get a good interest rate if you are eligible for a mortgage, car loan or credit card. 

These days, most people in college have taken out student loans. In fact, a recent study by Fair Isaac Corporation (FICO) determined that the average student debt is in excess of $25,000. 

So, how does your student debt affect your credit score?

The answer to this question is not straightforward. Like any other loan, student debt is still debt; that is, it is still money that you owe and have not yet repaid.

Having student loan debt will not affect your credit score in and of itself.

In fact, according toFICO research, almost 40 percent of people with over $50,000 in student loans have a FICO credit score of over 700, which is very good. It is how you manage your student debt that determines how your credit score is affected.

Types of Loans

There are two primary types of loans: installment loans (such as mortgages) and revolving loans (such as credit cards). You can boost your credit score by having a variety of types of credit.

Student loans are a form of installment loan and therefore, can boost your credit score by showing that you have experience with this kind of credit. It is good to know that installment loans with a large balance, such as a student loan, do not affect your credit score as much as a large balance on a revolving loan (i.e. credit card) would.

Payment Timing

Student loans can have a positive affect on your credit score; if you repay your installments regularly with no difficulty. By doing so, you  demonstrate to lenders that you are a reliable risk for any type of loan, credit card or mortgage.

Payment history accounts for 35% of your credit score, and this is the aspect you will be affecting if you pay your student debt installments on time. Missed payments negatively affect your credit score in the same way that missed credit card payments would.

One common misconception is that paying your student loan off quickly in larger installments will boost your credit score.

This is not necessarily true. Though, missing payments and taking too long to pay off your student debt will definitely have a negative impact on your credit rating.

After you graduate, there is sometimes a grace period of up to one year  to find steady employment without your debt hanging over your head.

If you are still in school and have a part time job, you could reduce the impact your student loan will have on your credit score by making early payments.

Payment Default

The worst thing you can do to damage your credit score is to default on your student loan. Defaulting is a violation of the terms of your contract and usually means that you have not made a payment or arranged to defer payments for over 270 days.

If you are going on to further your education or are earning under the threshold income to repay your loan, you must inform the student loan company. Otherwise, you will be in default and have a  "black mark" on your credit report for 7 years.

In Summary...

Student loan debt can be a good thing for your credit score, provided you make your payments on time and in full. Even people with very large balances can have credit scores of over 700.

If, on the other hand, you miss payments or default on your loan, you risk severely damaging your credit score. For this reason it is vital to make contact with your loan provider if you intend to take further education or cannot pay your installments right away.

It is your payment behavior in general, not the size of your student debt, that determines whether creditors and lenders will consider you a reliable risk or not.

Related Information - Student Loan Debt

Student Loan Consolidation
Student Loan Forgiveness
Credit Reporting Bureaus
Tips to Improve Your Credit Rating
Credit Reports and Scores FAQs

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