How Much Do Student Loans Affect Your Credit Score

Making student loan payments late could negatively affect your credit score, but punctual student loan repayment can boost your credit score. Learn to manage your credit score.
Written by Erik J Martin
Financial Expert
Managing Editor
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a young female student having books and student loan

The vast majority of college students decide to finance their education, but many aren’t aware of how student loans impact their credit scores.

Yet establishing good credit is not too difficult to achieve once you learn how it works – and it is highly desirable:

According to Rod Griffin, senior director of Consumer Education and Advocacy at Experian, “Consumers with good credit scores have more opportunities to access credit at better interest rates.”

Citing a study by Credit Builders Alliance, he emphasizes that, over a lifetime, consumers with higher credit scores can save approximately $250,000. “This can allow consumers to meet their goals and obtain things like a home or car.”

How Student Loans Can Affect Your Credit

Student loan debt can affect your credit score positively or negatively. Whether it helps or hurts your credit score depends on how well you abide by the terms of your agreement, basically.

But there is more to it.

If you understand these aspects of what determines your credit score, you can prevent some costly mistakes that take a long time to fix:

  • Payment history
  • Credit age
  • Debt-to-income ratio

3 Ways Student Loans Can Improve Your Credit

Michael Lux, founder/CEO of Student Loan Sherpa, says there are several distinct ways in which student loans can have a profound influence on credit scores. The most important factors are discussed here:

Payment History

Consistently paying off the minimum amount due on your student loans every month – on time, without missing any payments – can increase your credit score over time. In fact, payment history accounts for about 35% of your credit score. “The more positive your payment history, as shown on your credit reports, the more favorable view lenders have of you as a consumer,” Griffin says. “This history demonstrates that you can manage your credit and repay your debt responsibly.”

Credit Age

A credit score is a reflection of your reputation for handling financial obligations properly over time, and that’s why a student loan could be very helpful to someone who’s just starting out.

“Having a longer credit track record is good,” explains Lux. “For many borrowers, their first student loan is their oldest line of credit.”

Debt-to-Income Ratio

Student loans can impact your debt-to-income (DTI) ratio too. DTI is your total sum of recurring monthly debt payments, such as student loans and credit cards, divided by your gross monthly income, multiplied by 100. A DTI of 43 or lower is preferred by lenders.

“Borrowing too much student debt can devastate your DTI for decades. Understand that, even if you never miss a student loan payment, you may still get denied for a mortgage loan later if you have too much debt relative to your income,” cautions Lux.

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Should You Take on Student Loans Just to Establish Credit?

To a lesser degree, credit mix may also affect your credit score. “When your student loans are reported to the three major credit bureaus – Experian, Equifax, and TransUnion – they can also increase the diversity of the debt listed on your credit reports. This is known as having an ‘account mix,'” financial debt resolution attorney Leslie Tayne explains.

So, even though being punctual with monthly payments on your student loans builds positive financial habits, borrowing student loans primarily to establish a credit history isn’t the best idea, warns Lux.

“Opening a credit card account is a significantly less risky, less expensive, and more reliable way to establish credit when done properly,” Lux says.

Choose the Right Kind of Debt

Ultimately, it’s important to take on the correct amount of debt so that you can accomplish other financial goals in life.

“Credit is a tool that can be helpful to consumers. But it must be used wisely,” advises Griffin. “That means taking on only the amount of credit you need and can repay.

“And it’s also beneficial to consider credit that will provide a good return on investment – such as student loans that can enable you to receive a good education and a mortgage loan which allows you to purchase a home that can increase in value.”

Is Having Good Credit Important?

You want to be successful, right?

When it comes to financial success, having a good FICO credit score is essential.

Your three-digit FICO credit score, which can range from 300 to 850, signifies how creditworthy you are as a borrower and your ability to pay down your debt. The higher your score, the more attractive you appear as a borrower to lenders, credit card issuers, banks, and other creditors. Lower scores often result in paying higher interest rates.

There’s no shame in having to borrow money via federal student loans or private student loans. However, being a responsible borrower on your student loans can serve you in the long run and make it easier to get approved or otherwise endorsed for future credit.

A good credit score can help you save money and be more successful financially when it comes to these things, too:

  • Renting an apartment
  • Applying for a new job
  • Getting an auto loan
  • Getting better insurance rates

Protect Your Credit in Bad Times

Despite your best intentions, you may fall behind on student loan payments. Perhaps you’re unemployed. Possibly, you forgot to send in a payment by the due date. Or maybe you’ve decided to stop paying altogether because you think the whole system is unfair.

Make no mistake: Missed and late payments can come back to haunt you.

“If you have federal student loans, they will go into default after 270 days of nonpayment. Interest will continue to accrue, which will increase your loan balance,” says Tayne.

Griffin says your lender will report late payments and delinquencies to the three credit reporting agencies. This can lower your credit score. You may also be sent to collections for your unpaid debt.

“Before missed payments escalate to this point, contact your lender and explain your financial hardship,” suggests Tayne.

“Getting approved for a loan deferment or forbearance can temporarily pause your payments without damaging your credit. Investigate switching to an income-driven repayment plan, too. This can help reduce payments if you lack the income to pay down your debt.”

Griffin agrees.

“Your best course of action is to talk to and work with your lender when you have a repayment problem. Lenders may be able to accommodate you, depending on your situation,” says Griffin.

How To Rehabilitate Your Credit

Wish your credit score was higher? Worried about the ability to get approved for future loans, credit cards, and financing opportunities? Take these steps to improve your credit by prioritizing student loan repayment:

Make Your Debt Payments on Time

This means making at least the minimum payment due by the monthly deadline.

Avoid Taking on Too Much Debt

If you already have student loans, think twice before applying for and using other loans or credit cards.

Be Careful Opening or Closing Too Many Accounts at the Same Time

Major credit bureaus take note of when accounts are opened and closed, and when a number of accounts change status all at once, it can be a strong indicator of financial distress in their view.

Aim to Lower Your Credit Utilization

This is the percentage of your credit limit you’re using, and it’s a major factor in how your credit score is calculated. “Reduce balances on your revolving debt and continue making on-time payments with other lenders to lower your credit utilization,” advises Tayne.

Check Your 3 Credit Reports at Least Once a Year

“Be sure to check them in advance of applying for large credit purchases such as a car or a home,” says Griffin. Look closely for any errors or negative marks. If you spot any, try to have them corrected by contacting the credit bureau that published that report.

Be Patient

“Depending on your account history, improving your credit score can take some time. For example, a bankruptcy can remain on your credit report for up to ten years.”Allow three to six months to address any issues you see on your credit reports to ensure there are no surprises when you apply for a new account,” Griffin says. Also, be aware that most negative marks on your credit report will stay there for seven years after a delinquent payment is reported or judgment is filed, notes Tayne.

About Author
Erik J Martin
Erik J. Martin brings his expertise to MoneyRates, covering finance topics from personal loans to real estate. Based in Chicago, Erik’s work has been published by the US Chamber of Commerce, AARP The Magazine, and The Chicago Tribune, to name a few. His extensive knowledge spans across varied sectors such as real estate, technology, and healthcare. Beyond the written word, Erik’s voice resonates in the podcasting world and through his blogs, and As a beacon of financial expertise, he guides readers towards informed choices.