Americans owe more in student loans than they do on credit cards, but how does that debt impact the rest of their financial lives? If the day comes when you want to buy a new car or a house, will your old college debt make it harder? And how do student loans affect credit scores?
Your credit score can boost or sink a home mortgage application, an auto loan, your insurance rates and sometimes even employment interviews. Whether you get a loan, and how much interest you wind up paying, can all come down to that magic FICO number.
So, do student loans affect your credit score? Yes, they do in several ways, including some you might not expect.
How do student loans affect a credit score?
Student loans are considered “installment loans,” meaning they generally carry a starting balance that’s repaid over time with a fixed number of payments. Home mortgages and auto loans also typically fall in this category.
FICO, which issues the most widely used credit score, treats installment loans differently than revolving debt, such as credit cards. With revolving credit, balances tend to go up and down over time. Borrowers access this credit whenever they need it. In the case of credit cards, that can mean any time you make a purchase.
All installment loans are treated the same way when calculating your FICO credit score — student loans don’t have their own category or receive any special consideration. It also doesn’t matter if your student loans are federal or private. Both are treated the same.
But just having a lot of these installment loans won’t necessarily hurt your credit score by itself. Debt usage — also known as your “credit utilization ratio” — makes up 30% of your score, according to Experian, but this is based only on revolving credit, not installment loans. So having $50,000 in credit card debt is likely worse for your credit score than $50,000 in student loan debt.
This isn’t to say that your student loan balance has no impact at all. If you apply for a mortgage, for example, the lender might look at your debt-to-income ratio — the amount you pay on your debts each month compared to the amount you make in income. In this case, a pile of college debt could make it harder to get approved.
But generally, when it comes to installment loans like student debt, balances turn out not to be such a huge concern. Instead, it’s the payments that matter.
It’s all about your monthly student loan payments …
The biggest relationship between student loans and credit scores involves whether you’re making your payments on time and in full.
Payment history accounts for 35% of your FICO score — the most of any factor. Just one late payment can cause your credit score to drop.
While how much your credit score changes depends on many factors, consider these two examples from myFICO: Alex, who has an average credit score of 680, could lose 60-80 points from just one 30-day delinquency, while Benecia, who has an excellent score of 780, stands to lose 90 to 110 points.
Loans in default or collections can hurt even more. Being a few days behind on a payment probably won’t hurt your credit score, but if you’re 30 days or more late on a private loan, it can appear on your credit report. For federal student loans, late payments are reported to the three major credit bureaus after 90 days of delinquency. (Though in both cases, you’re fine if your loans are in deferment.)
If you’re having trouble making payments, consider the various repayment options so you can keep paying on time.
How student loans could help your credit
Just as student loans can hurt your credit, they can help your credit as well.
Part of the FICO calculation includes credit mix — the different types of loans and lines of credit you have. Having both installment loans and revolving loans on your credit report can be a good thing for that metric.
And while credit mix is a relatively small factor in your credit score, at just 10% of the total, it can give you a little boost if both types of debt show up on your credit report.
(Keep in mind that once you pay off your student loans, it’s possible you may see your credit score drop slightly if that student debt was your only open installment loan. But financial experts don’t advise avoiding paying off student loans for the sake of your credit mix.)
The length of your credit history also serves as 15% of your credit score, and since student loans are often attached to long repayment periods, this can help you build a healthy credit file. Of course, it’s always best to pay the loan off as quickly as possible, instead of keeping it open just for the sake of your score.
Don’t sweat your student loan debt
While this article has covered a lot of the ways student loans can impact your credit score, you may be better off looking elsewhere if you want to increase your FICO number. As FICO itself says, credit cards are usually much more crucial.
“It’s important to note that while student loan debt can factor into the FICO score, credit card debt has a larger influence,” FICO stated in its blog. “That’s because we’ve found that credit card indebtedness has a stronger statistical correlation with future borrower performance than installment loan indebtedness.”
And regardless of what kind of debt you have, make sure to keep tabs on both your credit score and credit report. You can do this for free, so there’s no reason not to be vigilant.
Don’t forget these three key takeaways:
- Student loans are treated the same as other types of loans for your credit score.
- Having more student loan debt isn’t automatically bad for your credit score.
- Focus on making student loan payments on time. It’s likely to have the biggest impact of anything related to your student loans and credit score.
Laura Woods contributed to this report.
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