Student loans are a major financial commitment and not just because of the long road to repayment. They can also have a bearing on your credit score — and by extension, your overall financial health and borrowing capability.
The good news is that the impact of student loans on credit is not necessarily bad, though it certainly can be. Rather, “student loans affect your credit score in much the same way other loans do: Repaying the loan on time will strengthen your credit; paying late will hurt it,” said NerdWallet. There is a little extra buffer when it comes to student loans and your credit too, as they “may give you extra time to pay before you’re reported late.”
How do student loans impact your credit score?
There are a number of ways student loans can impact your credit score, and the influence can be either positive or negative:
Hard inquiries: If you apply for student loans with a private lender, that will require a credit check. This helps the lender determine whether to approve your application, but it also “can cause your credit scores to temporarily drop each time they appear on your credit report,” said Equifax, one of the three major credit bureaus.
Payment history: How student loans “affect your credit score depends a lot on how you manage your monthly payments,” as “payment history is the most important factor in determining your credit score,” said CNBC Select. If you are late on payments, that will drag down your score. Meanwhile, “making regular, on-time payments on student loans will help build credit,” said NerdWallet.
Credit mix: Having multiple types of debt is viewed positively by lenders, as that juggling “helps show that you’re a responsible borrower,” said Experian. As such, “taking out a student loan can potentially increase your credit scores by diversifying your credit mix, or the different kinds of credit that appear on your credit report.”
Length of credit: “The longer your credit history, the stronger your credit score may be — because it demonstrates your ability to manage credit and debt over time,” said NerdWallet. For many, “student loans are their first foray into debt repayment,” thus they can help to “establish a long credit history before taking out larger loans, like mortgages.”
Amounts owed: “Credit score calculations consider the amount of debt you owe, which includes the amount you owe on an installment loan like a student loan,” said NerdWallet. Having a large debt to your name “can influence your ability to borrow more, such as a mortgage loan,” said CNBC Select.
How long do student loans stay on your credit report?
“Loans closed in good standing will remain on your credit report for up to 10 years,” said the credit bureau TransUnion. However, negative marks in regards to your student loans will stick on your report as well.
Generally, borrowers with federal student loans “won’t see their delinquency, or missed payments, reported until they are 90 days past due,” said CNBC Select. Private borrowers, however, “may not have as much time since private lenders can make up their own rules.”
Unfortunately, “even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years,” said TransUnion.