Student loans can play a significant role in building credit when managed responsibly. These loans are considered installment debt, and making on-time payments contributes positively to your payment history, a key factor in credit scores.
However, missed payments or defaulting can harm your credit. This article explores how student loans affect your credit, offering tips for managing them wisely to establish a strong financial foundation. Read on to learn more.
Key Points
• On-time payments for student loans positively impact your payment history, a key factor in credit scores. Conversely, missed or late payments can significantly harm your credit.
• Having student loans adds diversity to your credit mix, which can slightly boost your score when combined with other credit types, like credit cards.
• Federal and private student loans can establish a long credit history, as they often span many years, benefiting your credit score over time.
• Federal loans provide income-driven repayment options, reducing the risk of missed payments and protecting your credit during financial challenges.
• Refinancing student loans involves a hard credit inquiry, which may temporarily lower your credit score. However, if refinancing reduces monthly payments or interest rates, it can help you manage debt more effectively, potentially improving your credit score in the long term.
How Student Loans Appear on Your Credit Report
Your credit report is a statement that contains information about your credit activity and current credit information (such as payment history and credit account status). They differ from credit scores, which are three-digit numbers that predict how well you’ll repay a loan. They are calculated based on information on your credit report.
Student loans appear on credit reports because they show your payment history and whether or not you make payments on time. Late or missed payments can affect your credit score.
Student loans are installment loans (similar to auto loans or mortgages), meaning that you pay the principal back, usually with interest, over a certain amount of time. Once you pay off your installment loan, the account closes.
Student loans may appear on your credit reports even while deferred and while you’re in school (before you’ve started making payments).
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The Impact of On-Time Payments
Do student loan payments build credit? Yes, but first, let’s walk through the factors that can help build your credit score:
Paying on time can help you build your credit score. Lenders know that good credit scores demonstrate that you’re a less risky borrower. Paying your student loans on time can help you gain access to the following:
• Loans
• Credit cards
• Higher loan amounts
• Higher credit limits
• Lower interest rates
You’ll also avoid fees and penalties from your lender when you make on-time payments. Not making timely payments can cost you more money than you originally owed. You can sign up for automated payments to ensure that you make your payments on time and don’t rack up fees.
Here are some other factors that can help build your credit:
• Payment history: A lengthy history of on-time payments can help your credit scores, while chronic late payments can negatively affect your credit.
• Amount you owe: The dollar amount on your loans and credit cards can affect your scores. As you pay off your student loans, a lower balance can help you build your score. Your credit utilization rate (the amount you use) can also impact your credit.
• Credit history length: A longer credit history can help your credit score. Note that your student loan’s account history can begin when the loan is disbursed (even if you don’t start making payments until you graduate).
• Credit mix: Having many types of credit can help your scores. For example, if you have a credit card and student loans instead of just student loans by themselves, it can boost your credit.
• New credit: Applying for new credit can result in a temporary dip in your credit score, so avoid taking out new lines of credit often.
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The Effect of Late or Missed Payments
Let’s walk through what happens after you miss student loan payments.
The first day after you miss a payment, your loan becomes delinquent (past due). Your loan will have a delinquent status until you repay the past due amount or make other payment arrangements.
However, if you stay delinquent on your federal student payment for 90 days or more, your loan servicer will report the delinquency to the national credit bureaus, which could negatively impact your credit.
Your loan will go into default after a certain number of days (270 days for some federal loans — Perkins loans go into default immediately). The numbers may be different for private student loans — your loan may go into default after just a few missed payments.
Your lender may hire a collection agency to try to collect on your debt or take you to court.
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Student Loans and Credit Mix
Credit mix is the different types of accounts that make up your credit report. In other words, your credit mix might include more than just student loans; it might also include credit cards, auto loans, and a mix of revolving and installment loans. When you have a wider credit mix, creditors can see how you manage various types of credit.
Recommended: Undergraduate vs. Graduate Student Loans: 6 Ways They Differ
Strategies to Use Student Loans for Credit Building
Remember the following strategies to use student loans to build your credit:
• Pay on time: Payment history represents a large part of your credit score, so you must stay on top of those loan payments. You can set up autopay with your loan servicer to ensure you never miss a payment.
• Diversify your credit mix: Diversification can help build your credit. This means taking on more than one type of credit. For example, if you have a student loan and a credit card, your credit score may increase.
• Account age: As we mentioned before, the older your accounts, the better. Having accounts open for a long time can build your credit, especially if you consistently make on-time payments.
Potential Risks and Considerations
When you don’t make your student loan payments, they might go into default after a certain amount of time. Defaulting on federal student loans can potentially lead to the following negative consequences:
• Unpaid loan balance becomes immediately due (called acceleration)
• Tax refunds and federal benefit payments are withheld
• Garnished wages
• No deferment or forbearance options
• Losing eligibility for other federal student loan benefits, including repayment plans
• No eligibility for additional federal student aid
• Damaged credit
• Loan holder taking you to court
• Withheld official college transcripts
Defaulting will stay on your credit report for up to seven years.
How Student Loan Refinancing Can Affect Your Credit Score
Student loan refinancing can impact your credit score in both positive and negative ways. Initially, applying for refinancing triggers a hard credit inquiry, which may cause a small, temporary dip in your score. Additionally, opening a new account through refinancing may slightly reduce your average account age. However, these effects are typically minor and short-lived for borrowers with strong credit histories.
Over time, refinancing can positively influence your credit score if it helps you secure a lower interest rate or monthly payment. This makes it easier to stay on track with payments, building a positive payment history, which is the most significant factor in your credit score.
Recommended: How Refinancing Student Loans Can Affect Your Credit Score
The Takeaway
Paying student loans can help build your credit, but they can also negatively affect your credit if you don’t make regular payments or neglect to make your payments altogether. Therefore, your best bet is to make consistent payments over time.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
When do student loans start affecting my credit score?
Student loans start affecting your credit score as soon as they are disbursed. The loan appears on your credit report, impacting factors like credit age and credit mix. Your score is further influenced by your payment history, so making on-time payments positively affects your credit, while missed payments can harm it.
Can paying off student loans early hurt my credit?
Paying off student loans early doesn’t hurt your credit but may impact factors like credit age and mix. Once the loan is closed, it stops contributing to your credit mix. However, the positive payment history remains on your report, benefiting your score. Always consider financial goals before early repayment.
How long do student loans stay on my credit report?
Student loans will stay on your credit report during the entire repayment term (the length depends on your repayment plan). They will remain until you pay off the entire loan amount in full or the loan balance is canceled as part of a forgiveness program.
Information about loan payments and loan statuses may stay on your credit for up to 10 years even after your account closes and you completely pay off your loan. Negative information might get taken off sooner, such as at seven years after the first missed payment or default.
Do federal and private student loans affect credit differently?
In terms of inquiries, most federal student loans do not require a hard inquiry on your credit report, except for Direct PLUS Loans for graduate/professional students and parents of undergraduates. Private student loans may require a hard credit inquiry, which can affect credit scores. Try to shop around quickly for your student loans (perhaps a two-week time frame) to minimize the impact on your credit.
Can student loan deferment or forbearance impact my credit score?
Federal student loans will remain in good standing on your credit reports during forbearance, as long as you meet eligibility requirements and maintain your repayment schedule. Private student lenders may or may not allow for forbearance, and if so, may be less lenient. Check with your lender or loan servicer to learn more.
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