Student loans can play a role in building credit when they’re managed responsibly. Making on-time student loan payments contributes positively to your payment history, a key factor in credit scores.
However, missed payments can be damaging to your credit. Read on to learn about how paying student loans may build credit and tips for managing your loans.
Table of Contents
- How Student Loans Appear on Your Credit Report
- The Impact of On-Time Payments
- The Effect of Late or Missed Payments
- Student Loans and Credit Mix
- Strategies to Use Student Loans for Credit Building
- Potential Risks and Considerations
- How Student Loan Refinancing Can Affect Your Credit Score
- Student Loans and Other Credit Score Factors
- FAQ
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 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, potentially benefiting your credit score over time.
• Setting up automatic payment and regular credit report monitoring can help borrowers stay on top of student loan payments and strengthen their credit.
• Refinancing student loans involves a hard credit inquiry, which may temporarily lower credit scores. However, if refinancing reduces interest rates, it may help a borrower manage debt more effectively which could positively impact their credit.
How Student Loans Appear on Your Credit Report
Your credit report contains information about your credit activity, including payment history and credit account status. It’s different from your credit score, which is a three-digit number that predicts how likely you are to repay a loan.
Student loans appear on your credit report as installment loans. These are loans that are repaid in fixed regular installments over a specific period of time. Your credit report will typically list the type of loans you have, the amounts, and the status of the account and whether or not it is in good standing.
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The Impact of On-Time Payments
A borrower’s credit score is calculated using information in their credit report to predict how likely it is that they will pay their bills on time. When it comes to student loans and credit scores, your credit report includes information on your student loans, such as your payment history and whether or not you make payments on time. Late or missed payments can negatively impact your credit score, while consistently making on-time payments may help build your credit.
In fact, on-time payments are one of the key factors that can help build your credit score because they demonstrate that you are a responsible borrower, and that you pose less risk to a lender. Payment history makes up the greatest percentage (35%) of your credit score.
The Effect of Late or Missed Payments
The first day after you miss a student loan payment, your loan becomes delinquent. If you are 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.
Most federal loans go into default after 270 days. If you have private student loans they may go into default after 90 to 120 days (this varies by lender).
Once your loan is in default, your lender may hire a collection agency to pursue the debt or they might take you to court. In the case of a federal loan, the government could garnish your wages and withhold your tax refund, among other consequences. And your credit rating can be damaged. A defaulted student loan remains on your credit report for up to seven years.
Student Loans and Credit Mix
Credit mix refers to the different types of accounts a borrower has. For example, in addition to your student loans, your credit mix might also include revolving loans like credit cards, and other installment loans, like an auto loan. When you have a diverse mix of credit, it shows creditors how you manage various types of lending products.
Strategies to Use Student Loans for Credit Building
If you’re working to build your credit, handling your student loans responsibly could help. Here are ways to potentially strengthen your credit profile.
Setting Up Automatic Payments
Payment history represents a large part of your credit score, as noted above, which is why staying on top of student loan payments is so important. To make the process easier, you can set up autopay for your loans to ensure you never miss a payment. As a bonus, you may also get an interest rate discount. Federal student loans offer a 0.25% interest rate discount for setting up autopay, and many private lenders offer autopay discounts as well.
Just log onto your account at StudentAid.gov to find out who the loan servicer for your federal loans is, and set up autopay on their website. For private loans, you can typically set it up through your lender.
Monitoring Your Credit Report Regularly
Lenders typically review your credit report before making the decision to approve you for a loan or credit card. The information in your credit report is one of the factors that helps determine your credit score.
Reviewing your credit report can help you make sure there are no mistakes in it. Things to watch out for include typos and incorrect information, credit cards or loans you never opened, false information about late or missed payments, and information that was not updated about an outstanding debt that was settled.
You are entitled to a free copy of your credit report once a year from the three major credit bureaus: TransUnion®, Equifax®, and Experian®. You are now also able to request your credit information weekly. One easy way to get your report is through AnnualCreditReport.com, which is authorized by the federal government to issue free credit reports.
If you spot errors on your credit report, you can dispute them by filing a report with the credit bureau as well as the company that provided the information.
Potential Risks and Considerations
While student loans may help build credit, there are also possible risks involved. Potential downsides include:
Taking on More Debt Than You Can Handle
To keep your student loans manageable and be able to make payments without overextending yourself, limit your borrowing to just what you need for school. Use your loans to pay only for tuition and other necessary education expenses.
The reason: Taking on too much debt could mean that most of your income ends up going toward debt payments. And you may be more likely to become delinquent on your student loan payments or even fall into default, which will negatively impact your credit.
Long-Term Credit Implications of Missed Payments
Missed student loan payments are not just a right-now problem — they can follow you well into the future. As soon as you miss a federal student loan payment, your loan becomes delinquent, and after 90 days of delinquency, it is reported to the credit bureaus. After 270 days, it goes into default. Private loans can go into default even sooner than that, typically after 90 to 120 days, depending on the lender.
Defaulting on federal student loans can potentially lead to your wages being garnished and your income tax refund being withheld. Defaulting on private or federal student loans can seriously damage your credit and cause your credit score to drop.
A defaulted student loan can remain on your credit report for up to seven years. That can affect your ability to take out a mortgage and get a car loan. The lender could also take legal action against you and/or send the loan to collections.
How Student Loan Refinancing Can Affect Your Credit Score
Student loan refinancing can impact your credit score in both positive and negative ways. When you refinance student loans, you replace your existing loan with a new loan that, ideally, has a lower interest rate and more favorable terms.
Here’s how refinancing might impact your credit score.
Credit Inquiries and Account Changes
To refinance student loans (which is different from student loan consolidation), you may shop around to different lenders for the best rates and terms.
Refinancing involves a hard credit inquiry, which may cause a slight, temporary dip in your score. As long as you keep your loan shopping to a short period, multiple credit inquiries will generally be treated as one, which can help minimize the impact to your credit score.
Additionally, taking out a new refinancing loan may slightly reduce the average age of your credit history. However, this impact is typically minor. On the plus side, a student loan can help improve your credit mix, which also factors into your credit score.
Potential Benefits of Lower Monthly Payments
If your new refinanced loan has a lower interest rate, your monthly payments may be lower, which could save you money on interest and over the life of the loan. Using a student loan refinancing calculator can help you see how much you might save with refinancing.
Besides the savings, a lower student loan payment may make it easier for you to pay your loans on time each month. That could help you build a positive payment history, which is the biggest factor contributing to your credit score.
It’s important to be aware that refinancing federal loans makes them ineligible for federal programs and protections, such as income-driven repayment and student loan deferment. Before you move ahead with refinancing, make sure you won’t need these benefits.
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Student Loans and Other Credit Score Factors
Besides payment history, student loans can affect your credit in other ways. These are two other important factors.
Length of Credit History
Your credit history — the length of time your credit accounts have been open — makes up 15% of your credit score. A longer credit history is typically beneficial for your credit score because it demonstrates that you’ve been able to responsibly handle credit over time, especially if you’ve been consistently making your payments.
Taking out student loans can help you build your credit history. Since you typically borrow these loans as a young adult, they may be one of your very first credit accounts and even what gets your credit history started. And because repayment terms last for years, these loans will remain on your report over the long term.
Amounts Owed and Utilization
How much total debt you have, including student loan debt, is what’s meant by “amounts owed,” a factor that accounts for 30% of your credit score. A key component of amounts owed is credit utilization — the amount of available revolving credit you’re using.
If you are using a large amount of your available credit, you may be considered a risk to lenders and your credit score may be negatively impacted.
The Takeaway
Student loans can have a positive or negative impact on your credit. Paying your loans on time each month could help strengthen your credit. But late or missed payments could damage your credit, especially if your loan becomes delinquent or goes into default.
Making on-time student loan payments is important for your credit and your financial situation overall. Methods that could make managing student loans easier include setting up automatic payments, regularly monitoring your credit report, and student loan refinancing. Considering the different options may help you decide what makes the most sense for you.
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 may start affecting your credit score shortly after they are disbursed. The loans appear on your credit report soon after disbursal, even while you’re in school, and they impact factors like length of credit history and credit mix.
The biggest factor in your credit score is your payment history, so making on-time payments when the time comes can positively affect your credit, while missed payments can damage it.
Can paying off student loans early hurt my credit?
Paying off student loans early doesn’t necessarily hurt your credit, but it may impact factors like credit history, credit utilization, and credit mix. However, the positive payment history remains on your report for about 10 years, which could benefit your score.
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 there until you pay off the entire loan amount in full or the loan balance is canceled as part of a forgiveness program.
However, information about loan payments and loan status may stay on your credit for up to 10 years after your account closes and you pay off your loan. Adverse information, such as student loan default, typically remains on your report for up to seven years.
Do federal and private student loans affect credit differently?
Most federal student loans do not require a hard inquiry, which can cause a slight, temporary dip in your credit score. Private student loans generally require a hard credit inquiry, which can temporarily cause a slight drop in your credit score. If you’re shopping around for private student loans, applying within a short time frame could help minimize the impact to your credit.
Can student loan deferment or forbearance impact my credit score?
Federal student loan deferment or forbearance generally does not directly impact your credit score, as long as your account is in good standing when you apply for forbearance or deferment, and you maintain your repayment schedule afterward. Private student lenders may or may not allow for deferment or forbearance. Check with your lender or loan servicer to learn more.
About the author
Melissa Brock
Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Read full bio.
Photo credit: iStock/designer491
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