When your student loans could help or hurt that crucial number.
You’ve got student loans and you’re interested in getting a credit card, buying a car — taking on some more debt. You know you need a good credit score but can your student loans help?
The short answer is that it depends on how you handle your payments. The long answer? We take you through how credit reporting works on student loans, when it can help, when it can hurt and how you can continue to have good credit even after you’ve made your last student loan repayment.
How student loans are reported on your credit
Like most lenders, student loan providers report your repayment history to the three main credit reporting agencies: TransUnion, Experian and Equifax.
It all starts the day your funds arrive at your school, when your lender or servicer first reports your student loans to the credit bureaus. If you have federal student loans or if repayment doesn’t begin while you’re in school, your credit report will either read “paid as agreed” or “current.” This will continue after you drop below half time or leave school if you have a grace period before you start making repayments.
Your lender typically starts reporting your repayments about once a month after your grace period ends — or whenever your repayments begin. If you make your payments on time, your credit report stays the same.
However, if you’re late on your repayments, your servicer will report your loan as delinquent to the three credit bureaus, typically after one month for private loans and 90 days for federal loans. If you miss several payments — usually around nine months — your loan goes into default, which your lender or servicer also reports to credit bureaus.
So why does this matter? Credit reporting agencies use the payment history on your credit report to calculate your credit score. In fact, your payment history counts for the largest percentage of the popular credit scoring system, FICO. The same is true for the second most common credit scoring system, Vantage.
Having a late payment or a default on your credit report can cause your credit score to sink enough to make it difficult for you to qualify for another loan and can be a significant roadblock if you want to get a new car or buy a home.
What are FICO and Vantage?
FICO and Vantage are both credit scoring systems, which TransUnion, Experian and Equifax use to calculate your credit scores. FICO scores are much more common than Vantage — when you hear a lender or company talk about specific credit scores, they’re usually referring to FICO scores unless otherwise specified. Because Vantage is slowly growing in popularity, it’s a good idea to keep both in mind. You’ll still want to pay more attention to FICO for now, since it currently impacts your life more than any other system.
How student loans differ from other types of credit
Credit agencies generally treat student loans the same as other types of personal loans. So, there’s no real difference in how paying off your student loan affects your credit score compared to a car loan, mortgage or even a jet ski loan.
That’s because credit bureaus consider all of these as installment debt: They come in a fixed amount and you pay it off in fixed, regular repayments. On the other hand, revolving debt — such as credit cards — differ slightly.
The main difference between installment debt and revolving debt is that the amount of debt you have affects your credit score differently. With a student loan, the amount of student debt you have doesn’t affect your credit score at all. With a credit card, however, taking on a high amount of debt could cause your credit score to drop.
This is because of something called credit utilization ratio, which is your credit balance divided by your credit limit. Let’s say you have a credit card with $10,000 in debt but it’s limit is $40,000. Your credit utilization percentage is $10,000 divided by $40,000, or 25%.
Your credit utilization ratio makes up 30% of your FICO score and 10% of your Vantage score. Both recommend you keep this percentage below 30% — otherwise it could start impacting your credit score.
With student loans, however, there’s no difference between the amount you borrow and the amount you could borrow, so credit utilization doesn’t come into play at all.
3 ways student loans could help build your credit
- On-time payments improve your credit score. As we mentioned before, making repayments on time is the most important part of maintaining your credit score — it counts for 35% of your FICO score. And unlike other types of loans, student loans often come with flexible repayment plans and deferment or forbearance options, making it easier than ever for you to make those repayments.
- Long loan terms build your credit history. Student loans often have longer terms than you’d get on most personal loans, helping you create a long credit history — which counts for 15% of your FICO score.
- Loans improve your credit mix. FICO also likes to see that you have several different types of credit — accounting for 10% of your score. If you only have credit card debt, taking out a loan could improve your credit score.
3 ways student loans could hurt your credit
- Late payments hurt your credit score. Late payments can always hurt your credit score as much as a history of on-time payments will help. Late payments stay on your credit report for seven years and can make it more difficult for you to get other types of financing.
- Defaulting hurts your credit score even more. If you default on your student loan, your account goes into collections, which is one of the worst things to happen to your credit score. You won’t be eligible for some types of credit until the default comes off your credit report after seven years.
- Applying for private loans could hurt your credit. Every time you submit an application for a private student loan, the lender performs a hard credit check, which impacts your score for approximately six months to a year. The inquiry itself stays on your report for about two years. With that said, most credit bureaus recognize you’re rate shopping if you have several credit pulls around the same time and count them all as one.
Missing payments is more of a risk if you have private student loans, as those often come with fixed repayments that could be unaffordable when you’re just starting your career. To avoid this, consider refinancing with a lender that offers more flexible repayment options or applying for deferment or forbearance, if it’s an option.
Consequences of defaulting on your student loan
Defaulting on your loan involves missing payments for an extended period of time, typically months. After you default, your loan goes into collections. Here’s what could happen if your loan goes into default:
- Your loan goes into acceleration. In other words, you’ll have to pay off your balance as quickly as possible.
- You could pay collections fees. Some student loans come with a collection fee if they go into default, which are typically a percentage of your loan balance.
- Your employer could garnish your wages. Your employer can automatically send a portion of your paycheck to your lender.
- Your school may withhold your transcript. Your academic transcript is property of your university and your school may withhold it until your loan is paid off.
- You won’t get tax refunds or federal benefits. If you have a federal loan, the government can withhold tax refunds and any federal benefits you regularly receive to pay off your student debt.
- You lender could sue you. It’s not uncommon for lenders to sue borrowers if other methods of collection don’t work. If your lender wins, you could find yourself ordered to pay your lender your debt along with additional attorney’s fees and other costs.
- You could have bad credit for years. Poor credit history makes it difficult to get an auto loan, mortgage or credit card until the default is off your credit report.
Consider refinancing options for your student loans
Forbearance or deferring student loan payments
If you’re struggling to make your monthly repayments, most student loan providers offer forbearance and deferment options. These put your payments on hold so you have a chance to work out your finances without becoming delinquent or defaulting on your loan and hurting your credit score.
Generally, forbearance is when you put your repayments on hold while interest continues to add up and deferment puts your repayments and your interest on hold. Many lenders, including the government, offer a certain amount of forbearance or deferment for any reason after you make a certain amount of on-time repayments, usually for a total of one to three years. Others require that you demonstrate financial or personal need to qualify.
If you’re not sure you’ll be able to afford your next student loan repayment, save your credit by reaching out to your lender or servicer as soon as you can to ask about your options.
What happens to your credit after paying off student debt
Once you pay off your student debt, your credit score will depend on what other types of credit you have. If your student loans were your only installment-type loans, paying off your student loan in full could actually hurt your credit rating. Remember how we mentioned that having a mix of different types of credit counts for 10% of your FICO score? Well, if you suddenly only have credit card debt — or no credit accounts at all — your diversity points will drop.
This usually isn’t a significant drop, however. And if you have other types of installment debt you might not see a dip at all. If this drop is enough to seriously impact your credit, consider taking steps to improve other factors that make up your credit score.
Planning for the future
For many people, student loans are just the beginning of building a personal credit score and managing debt. If you’re planning on buying a new home, opening a new credit card or taking out a loan for your wedding, follow these tips to keep your credit score in top shape:
- Pay attention to the monthly repayments. This is the best indicator of how much you’ll immediately have to afford to repay your loan. You can calculate your monthly repayment if you know your loan amount, term and APR. Many lenders will estimate your monthly repayment if you apply to prequalify.
- Watch accounts on autopay. While autopay gets rid of the hassle of remembering when your repayments are due, keep an eye on your accounts to make sure you always have enough funds to afford repayments and catch glitches in the system — not even machines are perfect.
- Don’t borrow more than you need. Larger loan amounts can translate into larger monthly repayments, which are more difficult to make room for in your budget.
- Stay away from your credit limit. Your credit utilization is almost as important to your credit score as making on-time repayments. Be careful not to let your credit card balance reach more than 30% of your credit limit.
How your student loan affects your credit mostly depends on if you’re able to make repayments on time. Aside from repayments, it’s generally positive — student loans can help diversify your credit and put you on track to building a long and strong credit history.
While credit reporting agencies treat student loans like any other type of personal loan, their various repayment, deferral and forbearance options give you much more wiggle room to skip or reduce your repayments without credit consequences.
Want to learn more about student loans? Check out our student loan guide.