How do student loans affect your credit score?

If you've borrowed money to pay for your college education, you may ask, "Do student loans affect your credit score?" After all, credit is an important part of your life as a consumer. It impacts how likely you are to be approved when applying for a new credit card, financing a new car or getting a mortgage. Lenders use your credit score to help determine whether they'll approve you for a loan and under what terms.

Here's information on the formula behind your credit score, how student loans can affect your credit and what you can do to help boost your score.

How a credit score is calculated

A credit score is a number calculated based on information in your credit report. While there are different types of scoring models, one of the best-known ones is the FICO® score.

A FICO credit score ranges from 300 to 850, with 850 considered an excellent score. A credit score consists of five categories or sections. Each category contributes a certain percentage to your score:

How student loans affect your credit score

Student loans are a type of installment loan, similar to a car loan, personal loan, or mortgage. They are part of your credit report, and can impact your payment history, length of your credit history and credit mix. Paying on time could help your score. Be late or skip a payment altogether, and your score may take a hit.

Payment history

If you're late with or miss a single payment, it may not affect your credit score depending on the loan type and how long it takes for you to make the payment. Typically, you have up to 30 days beyond the payment due date to pay before the missed payment is recorded on your credit report.

Subsequent reporting will occur on the 60- and 90-day marks, and these can have a drastic impact on your credit score because they can take up to seven years to be removed from your credit report.

To avoid being late, missing payments or defaulting, take a look at your repayment plan. Make sure it's a good fit for your situation and that you can keep up with the payments. You can change your repayment plan for federal loans at any time at no cost. You'll just need to reach out to your loan servicer to discuss your repayment plan options to determine which one works best for you. Anytime you're having trouble making payments, reach out to your loan servicer to find out what your options are.

Credit inquiries

A credit inquiry is a request to look at your credit file, which can result in either a hard or soft credit pull. A soft inquiry is often done by lenders reviewing your existing relationship or as a prescreen to offer you credit options. Hard inquiries are usually done when you are applying for credit and will likely happen when you apply for your student loan.

Hard inquiries are the only credit pulls that can have a negative impact on your credit score and usually stay on your credit report for up to two years. They can temporarily decrease your credit score, and too many hard inquiries in a short time are usually viewed negatively.

Credit length

The length of your credit or credit history is 15% of your credit score and many times may start with your student loans. That means that after your student loans are paid off, the length of your credit history may shorten and your average account age could go down. This could impact your credit score, but keep in mind that payment history and amounts owed are two of the biggest factors that contribute to your score.

Defaulting

When you miss a payment, you'll usually be subject to a late fee immediately. You'll be considered delinquent until you pay the past-due amount or initiate arrangements to pay or adjust your loan terms.

Crossing over from delinquency to default depends on your loan type. For instance, loans under the Federal Direct Loan Program or Federal Family Education Loan Program are considered in default if payments are missed after 270 days. The default period for private student loans depends on the lender and terms of your agreement.

Defaulting on a student loan may result in withheld wages and no further access to federal aid until the debt is settled or a repayment plan has been approved. No matter your loan type, defaulting will stay on your credit report for up to seven years.

How student loans can improve your credit

Student loans could  bolster your credit. For that to happen, you'll have to keep up with your monthly payments. And if you don't yet have a lot of different types of credit, student loans will add to your credit mix, which may also give you a boost.

If you take out student loans as a young adult, it may increase the amount of time you have had credit, which could raise your score. When you're just starting out and don't have a lot of open credit lines, your student loans could carry more weight toward the average age portion of your score.

Refinancing your student loans

When you refinance your student loans, a lender will pay off your debt and issue a new private student loan. This new loan may come with a lower interest rate or a different term or length of time you have to pay the loan. Over time, it could save you quite a bit of interest. It could also lower your monthly payment amount while lengthening your repayment term. However, to qualify to refinance your student loans, you'll need solid credit.

While refinancing can save you money, it can also pose downsides. When you refinance your federal loans to a private student loan*, you can no longer tap any of the benefits that come with the federal program, such as income-driven repayment, loan forgiveness, forbearance or deferment. You also can't switch back from a private loan to a federal one.

Stick with it on your student loan repayment

Whatever your circumstances, you should keep in mind the impact of your credit score when assessing your student loans. Even just making on-time payments represents an important first step in building and maintaining a good credit score.

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