How Student Loans Affect Your Credit
Your credit report is a history of accounts that includes information about how you pay your bills. It's smart to download your credit report free from annualcreditreport.com. Creditors, insurers, employers, and other businesses use your credit report to evaluate lots of things that mater (like your applications for credit, housing, and employment).
Your credit score is a three-digit number intended to predict whether you will pay your bills over the next couple of years. A high credit score helps you get access to good credit terms like lower interest rates.
Student loans show up on our credit reports and influence our credit scores. A high credit score means better terms on mortgages and other loans. A low credit score makes it hard to get good loans.
Student loans impact credit scores in all these ways:
- payment history,
- amount owed,
- length of credit history,
- new accounts and inquiries and
- credit mix.
Payment history is weighted the most heavily.
Payment history: As long as payments are made on time, student loans can improve your credit score as part of a positive payment history. Late student loan payments will lower your credit score the same as late payments on any other type of account and negative information will stay on your credit report for seven years. Student loans in deferment or forbearance are considered “paid as agreed” and contribute to a positive payment history.
Amounts owed: The amount of available credit you're using on revolving accounts is heavily weighted, but because student loans are categorized as installment credit, the amount owed on student loan debt does not have a significant effect on your credit score. Still, prospective lenders will consider student loan balances when evaluating whether or not you can manage additional debt.
Length of credit history: Student loans can positively affect your credit score by helping you build a long credit history. The age of a student loan is measured by the number of months since the open date.
Types of credit used: A student loan can positively affect your credit score by contributing to a mix of credit types, for example if you have student loans (installment credit) and credit cards (revolving credit).
New accounts and inquiries: Applying for new credit can cause a slight drop in credit score when the lender makes credit inquires and when new accounts first appear on a credit report. New student loans will have the same effect as any other new credit account.
If you're looking to get a mortgage, understand that prospective lenders also want to know that you can afford to make your payments. If you owe a lot on your student loans, even if you always pay on time, a prospective lender is going to factor your indebtedness into their assessment of your ability to make additional debt payments.
If you are applying for a mortgage your lender will probably ask you for a Loan Verification Letter that includes your loan “status” (like deferment, repayment, default or whatever) as well as your actual or estimated monthly payment amounts. You get that from your student loan servicer.
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