How does Student Loan Affect Credit Score

How Does Student Loan Affect Credit Score?

Last Updated on December 1, 2022

The way you handle a student loan can have a significant effect on your credit score. So, it’s important to understand how a student loan can impact your credit score.

A well-managed student loan that is paid on time each month can significantly boost your credit score. In contrast, missing even a single payment on your student loan can drastically lower your credit score.

In this article below, we will explain more about a credit score is calculated and the various ways your student loan debt can influence your credit score. 

How Is a Credit Score Calculated?

There’s the common belief that a person only gets one sort of credit score, but in reality, there are plenty of different types of credit score models. The most well-known credit score model is the FICO score.

The FICO credit score model will range from 300 to 850. 300 is the poorest score you can receive and 850 is the best score. The credit score will have five sections or categories that will contribute a certain percentage to your score.

How Do Student Loans Affect Your Credit Score?

Student loans affect your credit score in numerous ways, both positively and negatively. Below, we’ve listed the most common ways it can impact your credit score.

Positive Effects

In some ways, a student loan can have a positive effect on your credit report over time. Most students will take out a student loan before they’ve established any kind of credit history, which leads to some long-term benefits. Some of these benefits will include the following:

Credit mix: Lenders always want to see someone who can handle different types of credit. This means having a credit card and a student loan will be better than having two credit cards. Furthermore, you should keep in mind that mixed credit accounts will make up ten percent of your FICO score.

Positive payment history: Paying your monthly installments in full and on time will help you establish and maintain a good credit score. Your payment history will be 35% of your FICO score, and you need to keep track of your payments.

Long credit history: Typically, graduates won’t have a chance to establish their credit history, but taking out a student loan will help students to do this. Normally, a student loan will have repayment plans that can last from ten to thirty years, which will lengthen your credit history. This will make up 15 percent of your FICO Score.

Negative Effects

It’s important to keep in mind that a student loan is a debt just like any other debt. This means that a student loan can harm your credit score, both temporarily and over time.

Some negative effects on your credit score can include the following: 

Delayed benefits: It can be surprising that a student loan won’t have an enormous impact on your credit score until you begin payments after graduation. The student loan will show on your credit report right after you get the loan funds. The more significant benefits will come after making timely payments, which don’t need to be paid until six months after graduation.

Negative payment history: If you’re late paying a monthly installment by 30 days or more, it could be reported to the national credit bureaus. Remember, your payment history will have the biggest influence on your FICO score. So, even if you miss just one payment, it can have a devastating effect on your credit score. It will still stay on your credit score for seven years.

Credit inquiry: In most cases, borrowers won’t have to go through a credit check when applying for a federal student loan. In contrast, for private student loans or student loan refinancing, the lender will normally conduct a hard inquiry on one or more credit reports. This inquiry will ding your credit score for a short time, but each hard inquiry could lower your credit score by less than five points.

The Role of Monthly Payments

Girl Counting Money

Your monthly payments on your student loans will have a significant effect on how your student loan affects your credit score. Sometimes, if you miss a single payment or if you are late by more than 30 days, it might influence your credit score, but this will depend on the type of loan.

However, if you miss more than one payment on your student loan, it could have a damaging effect on your credit score. This is because your payment history will make up one-third of your credit score.

You should look at your student loan’s repayment plan, so you can ensure that it will fit in with your lifestyle and situation and keep up with the payments. This will help you avoid missing payments, being late, or defaulting on your student loan.

With federal student loans, you can change and adjust your payment plan at any time at no extra cost. To complete this, you need to contact your loan servicer to discuss your repayment plan and which options will work best for you.

If you suspect that you won’t be able to pay, it’s always a good idea to contact your loan servicer to find out what you can do and what your options are. 

How Do Student Loans Affect a Co-Signer’s Credit Score?

Whether you’re applying for student loan refinancing or a private student loan, your credit might not be enough for you to get a student loan on your own. In this situation, you might need to ask a family member to co-sign a student loan application.

Generally, a student loan will impact the co-signer’s credit score in the same way that it will impact your credit score. This is because the co-signer is acting as a guarantee that the student loan will be paid in full and on time if the primary borrower (you) doesn’t do this.

In the student loan application process, the lender will conduct a hard inquiry on you and the co-signer’s credit reports. Payments made on time will have a positive effect on your credit scores, while a single late or missed payment will dramatically harm the co-signer’s credit score.

The student loan will also appear on the co-signer’s credit reports as if the student loan was part of their debt. So, when they apply for credit, such as a mortgage, their debt-to-income ratio will include the student loan payments.

How Does Student Loan Forbearance Affect Your Credit Score?

Forbearance can temporarily pause your monthly payments if you can’t keep up with your monthly payments. Normally, this forbearance can last for a few months at a time.

During a forbearance, you’ve agreed with your lender or loan servicer to skip loan payments for a short period. This means that the forbearance won’t hurt your credit score. If you miss one or more payments after the forbearance, it could damage your credit score.

You should also remember that the forbearance will put your payment on hold, but the interest will keep on growing, increasing your loan balance and monthly payment.

How Does Student Loan Forgiveness Impact Your Credit Score?

The effect that student loan forgiveness will have on your credit score will depend on the type of loan forgiveness you get. For example, if you only receive partial forgiveness, you will still have to pay your student loan, but there won’t be any direct impact on your credit score.

In contrast, if you manage to receive full forgiveness, it will close your loan accounts, which will impact your credit score. Because receiving full forgiveness means that you’ll have fewer loans on your record, and it will decrease the average age of your accounts.

The positives of student loan forgiveness will outweigh the possible small or temporary negative effects on your credit score of possibly closing a credit account.

If You Pay Late or Skip a Payment

Life happens and occasionally, we forget to make payments on our student loans. A single missed payment might not hurt your credit score. Your credit score will be affected when your lender reports your late payments to all three major credit bureaus.

How long it takes for a lender to report your late payment will depend on the type of student loan. For federal student loans, the loan servicer will wait a minimum of 90 days to report your late payment. For private loans, lenders will wait a minimum of 30 days to report late payments.

Lenders can charge borrowers a late fee the moment they miss a payment. When a lender reports your late payment, it’s known as a delinquency, and it will stay on your credit report for seven years.

The longer your payment is overdue, the more it will harm your credit score. For example, if you haven’t paid your student loan for 260 days, it will harm your credit score more than a 30-day delinquency would.

If You Cannot Pay Your Student Loans

If you are struggling financially, you might be unable to pay the monthly installment on your student loan. In this situation, you should contact your lender and discuss temporarily pausing your student loan payment or lowering your monthly payments. Your options could include the following:

  • Apply for forbearance or deferment to temporarily stop your monthly student loan payments.
  • If you have a private student loan, you can discuss adjusting your payment plan with your lender.
  • You can apply for an income-driven repayment plan if you have a federal student loan.

Adjusting your payment plan won’t hurt your credit score, just as long you manage the monthly payments.

Final Thoughts on Student Loans and Your Credit Score

After reading this article, you should know more about how a student loan can affect your credit score. It doesn’t always have to be a negative thing. A student loan can have a positive effect on your credit score.

For example, if you have a credit card and a student loan will show that you’re able to handle different types of credit. Moreover, if you pay the installments on your student loan on time, it will help you build a good credit score, even when you’ve just graduated.

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