If you’ve borrowed or plan to borrow student loans in the near future, you might be curious about how they impact your credit. Your credit score and credit history are important to your future, since they affect whether you can borrow a loan, like a mortgage. Your credit also affects the interest rates you’ll receive.
Typically, college-aged students don’t have a very deep credit history. As you sign up for your student loans, keep their repayment in mind, as it’ll have some impact on your credit for the future.
Does applying for student loans affect credit?
For students, applications for student loans don’t require a credit history — as long as you’re taking out federal loans that aren’t Graduate or Parent PLUS Loans. A lack of credit shouldn’t prevent you from accessing federal student aid.
However, private student loans typically require a credit check. If you don’t have credit or have bad credit, finding a willing cosigner might be necessary to qualify.
Student loan repayment impacts your credit
The way you handle your student loan payments affects your credit score, just as any other type of debt payment. If you’re late on payments or don’t pay the full amount, it could negatively impact your credit score. On the other hand, paying on time and in full has a positive impact on your credit.
Your payment history factors as 35% of your total FICO score, so take care to safeguard it by paying responsibly. The best thing you can do for your credit and your financial future is paying all of your accounts in full and by the due date.
How student loans differ from credit cards
Your student loans and how you handle them will affect your credit score. Most student loans are installment loans, meaning they’re debts you make a specific payment towards every month for a fixed period of time. Other common installment loans include auto loans, mortgages, and personal loans.
Credit cards, on the other hand, are a revolving form of credit. This means you have access to a preset maximum amount to borrow and your payments correspond to how much you spend. Payments can vary from month to month.
The credit bureaus — Experian, TransUnion, and Equifax — like to see some variety in your types of debt. Experian reports that have a combination of revolving debt and installment debt can help your credit scores. Keep in mind that credit mix only accounts for 10% of your FICO score, so it won’t make a huge impact on your score by itself.
What to do if you can’t afford loan payments
There’s no question that sometimes circumstances arise that make it extremely difficult to keep up all your financial obligations, including student loan payments. If you’re temporarily unable to make your loan payments in full and on time, the best course of action is to contact your student loan servicer to learn about your repayment options.
You might be able to negotiate a modified payment schedule, a deferment, or forbearance to pause payments or enroll in an income-driven repayment plan. Be sure to communicate clearly with the lender and follow any new agreements made to the letter. This demonstrates your commitment to paying off your loans.
How late payments affect your credit
Late payments, generally speaking, are a bad idea for any borrower. The first day after a missed student loan payment, you become delinquent, but you can still pay the amount due as quickly as possible. The good news is that with most federal student loans, delinquency won’t be reported to the credit bureaus until the 90-day mark, giving you some time before a late payment harms your credit.
However, get back onto your payment schedule as quickly as possible, and negotiate a modified plan with the lender if necessary. After 270 days of delinquency on an account, you go into default, which brings much bigger problems.
A borrower who has defaulted on student loans won’t be eligible for forbearance or deferment. Plus, they might be unable to secure financing on any future loans, they could face wage garnishment, and repairing and rebuilding credit can take years (most derogatory marks remain on credit history for seven years).
Beware of private student loans; these lenders often report late payments much sooner than federal loan servicers, so check with your specific loan provider if you’re unsure.
Can refinancing student loans impact your credit?
Many student loan borrowers decide to refinance their student loans to get a lower interest rate. This means essentially taking out a new loan under different terms. As you shop around, compare different offers to find the best option for you. To avoid negatively impacting your credit score, aim to complete all applications within a 14-day period. That counts all applications as a single credit inquiry, having less of an effect on your score.
Another option: many lenders have a prequalification process. It’s much faster and doesn’t require a hard credit inquiry but can give you an estimate of their refinancing options.
Forbearance or deferment and your credit scores
Putting your student loans into forbearance — a temporary pause on your monthly payments due to financial hardship — shouldn’t have a negative impact on your credit, according to the Department of Education’s Federal Student Aid Office.
When the COVID-19 related forbearance was automatically instated, some people noticed a drop in their credit scores as reported by third-party reporting agencies. These were likely not decreased in the FICO Score, however, which is the scoring model that’s used by 90% of lenders today in evaluating someone’s creditworthiness.
Bottom line
The best way to keep your credit scores within a favorable range is to faithfully make payments on debt accounts on time and in full. This applies to any type of loan, including your student loans.
There are some steps you can take to remedy the situation if you do end up struggling to manage your student loan payments. Communicate with your lender and monitor your credit scores to ensure the best possible outcome.
About the Author
Travis Hornsby, CFA, is founder and CEO of Student Loan Planner. He is one of the nation’s leading student loan experts, and has personally consulted on more than $500 million of student debt.
