How Student Loans Affect Your Credit Score

Often classified in the “good debt” category, student loans can help young people establish a credit history—when they’re paid responsibly. While there are other ways to boost your credit score safely, student loans allow you to make a significant financial commitment every month.

The Many Ways Student Loans Impact Your Credit

Like other financial products, student loans appear on your credit report. Credit companies use this report to calculate your credit scores, meaning certain actions can affect your credit.

Student Loans are Considered Installment Loans (Like Mortgages)

Whether you get a student loan from the government or a private student loan from SoFi, student loans are considered installment loans. This puts student loans in the same category as car loans or mortgages, which are paid off in a similar way within a set period.

With installment loans, the borrower will pay back the principal amount (or the amount initially borrowed) plus whatever interest is incurred. Once the loan is completely paid off, it closes and can’t be used. This is different from revolving credit, like credit cards, which remain open.

Student Loans Influence Your Debt-to-Credit and Debt-to-Income Ratio

Debt to credit ratio describes your utilized credit compared to what’s still available for you to use. Since student loans aren’t revolving, your debt to credit ratio will remain high until you take out other credit types—for example, a credit card with a $5,000 limit that you don’t use.

If you don’t rack up your $5,000 credit card, you’ll have $5,000 of credit to use versus whatever you used on your student loan. You can typically apply for a credit card with a 650+ credit score.

On the other hand, your debt-to-income ratio describes the debt you owe divided by your income. If you have no income, your debt-to-income ratio will skyrocket. This ratio is a big reason why a lot of Americans can’t apply for credit, even with a high credit score.

If you already have a loan and you’re looking for other forms of credit, your current student loan will affect how much you can borrow and how likely you are to pay your debt back.

Student Loans Can Appear on Credit Reports While in School

Usually, you’ll start paying your student loans after you graduate. However, most bank loans will appear on your credit report, even when you’re in deferment. For this reason, it’s a good idea to start making payments while at school because it keeps your credit in good standing.

Not only that, but you’ll also avoid incurring more interest on your loan. By making a lump sum payment when you graduate, you can reduce the amount of interest you’ll pay overall.

If you qualify for a forbearance or deferment after you graduate, keep in mind that this won’t affect your credit. Since it’s a momentary pause on your loans, you don’t have to pay interest, although it still incurs. If possible, make a lump sum payment after you start making payments.

Student Loans Are Easy to Pay Off With a Payment Plan

If you want to pay off your loan as soon as possible but you’re not sure if you can manage it, stick to the payment plan the lender provided. You’ll need to know how much you’re supposed to pay each month, so you can keep payments down and keep your credit score high.

However, if you can’t afford your minimum monthly payments, ask your lender to extend your payment period. Although you will increase the total interest on your loan, you’ll avoid the negative consequences of having bad credit. You can always change the payment period later.