If you owe money on your student loans, you’re not alone; more than 44 million Americans are in the same boat. You may wonder if your student loans affect your credit score. The answer is yes, they do, but the effect can be either good or bad. It depends, for the most part, on whether you make your student loan payments on time.
Why your Credit Score is Important
A good credit score is the key to financial freedom as you start your adult life. With a good score, you can get credit cards, car loans, and a mortgage to start building the kind of life you dream of. With a bad credit score, however, you will pay higher interest rates or may not qualify for loans at all, even if you have a steady job.
You can Owe a Lot in Student Loans without Hurting your Credit Score
Your FICO scores are based on two different kinds of loans. The first, called revolving loans, refers to loans where you have a credit limit, and the amount you owe varies, depending on how much credit you use each month. Credit cards are the most common type of revolving loan. With installment loans, on the other hand, you make regular payments over a fixed period of time. Your student loans are considered installment loans, along with mortgages and loans for vehicles.
The reason these differences are important is that your FICO score is affected by installment and revolving loans differently. Carrying a large amount of credit card debt can hurt your score. However, you have more leeway with installment loans; you can owe more without lowering your credit score. So even if you have a high balance on your student loans, you could still have a great credit score.
Late or Partial Payments on your Student Loans will Lower Your Score
Your payment history is an important part of your credit score – it counts for more than one-third of your total score. All kinds of payments, including credit card and mortgage payments, will affect your score. However, if you don’t yet have a mortgage, and if you have few or no credit cards, then your student loan payment history will be even more important.
Even a single missed student loan payment can hurt your score if you don’t have a long credit history. If your loans are in default or have gone into collections, that’s even worse. Loans that are in deferment, however, are not a problem.
Student Loans can Improve your Credit Mix
Your FICO scores are also based on whether you have a mix of both installment and revolving loans. This is not as important as your payment history; mixed credit only factors into 10 percent of your total score. However, having a student loan means you have an installment loan. Combine that with credit card usage, and your score will get a little boost.
How Student Loan Borrowers can Raise their Credit Scores
There are several steps you can take to raise your credit score:
1. Pay all your bills on time, including your student loan payments
It’s very important to be consistent about paying your bills on time. Consider setting up an automated payment system so that you don’t miss payments because you forgot about them. Making payments on time and in full is the most important thing you can do to improve your credit score. According to the FICO blog, 75 percent of the people who increased their FICO scores by at least 40 points in a year had no late payments at all. On the flip side, 74 percent of those whose FICO scores dropped by at least 40 points during the year were late on at least one payment.
2. Lower the amount you owe on your credit cards
If you are carrying a balance on your credit cards, try to pay it down. You won’t get very far paying just the minimum due, so try to pay more than that each month.
3. Search for errors on your credit reports
Sometimes a bad credit score can be a mistake. It may have nothing to do with your behavior. Instead, it could be the result of a clerical or other type of error that a credit bureau made.
4. Use a credit repair service
If your scores are low, you don’t have to deal with it on your own; a credit repair service will work with you to raise your scores. They have the experience and knowledge to search for and correct errors in your credit reports.