You’ve probably heard the “sage advice” that student loan debt is good debt before. But if you’re here, asking this question you’ve got thoughts of your own and want to get to the bottom of the financial impact of student loan debt. How do student loans affect a repayer’s credit? In today’s post we’ll talk about how student loan debt can affect your credit.
Estimated read time ~5 minutes, estimated watch time at 1.5x ~2 min.
The Positive Impacts of Student Loans on Credit Score
Student loans can have a positive impact on credit score. Student loans can boost your credit score by providing positive repayment history and increasing the average age of your credit. To a lesser degree, having different types of credit can also boost your credit.
Making student loan payments consistently and on time can boost your credit score. Repayment history makes up a major chunk of your credit score, about 35%. So repaying your student loans on time each month improves your credit score over time.
Student loans can increase the duration of your credit history because they take a long time to repay. Long repayment is a burden but carries a surprising benefit. Many young adults don’t have much history with credit. Student loans can serve as a sign that you have experience with credit and boost your score. The age of your credit history makes up about 15% of your FICO credit score. You can lose the boost in age of credit history if you decide to consolidate or refinance your loans after a long period of repayment. Consolidated loans are brand new loans so the “age of credit” starts over.
Having student loan debt can signal a good mix of credit. Creditors also like to see a diverse mix of credit. Credit mix impacts your FICO score by 10%. So while diversity such as credit cards and auto loans are one piece of the credit picture they’re not the most important piece.
Student loan repayment mistakes will hurt your credit score
In the same way on time student loan repayment history will boost your credit score, late payments and default can tank your credit score.
Missed or late payments will be reported as adverse credit history. Your payment history is responsible for 35% of your credit score. The later the payment the more negative the impact on your score. Frequently missed payments also decrease your credit score more. A single missed payment can reduce your credit score by 90 or more points, even if you’ve never missed a payment before.
Defaulted student loans are 270 days or more overdue. The history of default can remain on your credit score for 7 years. Rehabilitation can remove the history of default from your credit history. However, rehabilitation doesn’t remove the late payment history that led up to the default.
High debt relative to income can impact your ability to secure a loan. Debt-to-income is used as a measure of financial health. A high monthly student loan payment relative to your income won’t affect your credit score. However your debt-to-income ratio will be used to determine the affordability of a new loan, such as a mortgage. If it’s too high, you may have difficulty getting approved.
Savvy Repayer Checklist
- Make your payments on time every time.
- Make your payments in full.
- Contact your student loan servicer immediately if you’re going to have trouble making a payment.
Have you noticed that your student loans affected your credit score either positively or negatively? Let me know in the comments below or on the Repayable Facebook Page.
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