How do Student Loans Affect Credit Score?

How do Student Loans Affect Credit Score?

The cost of college has never been higher. Moreover, it’s becoming more difficult to get a quality job without a college degree. As a result of these two trends, more people than ever before are taking out student loans.

Additionally, the amount of money that people are borrowing to go to school has never been higher. This situation has left plenty of people wondering how student loans affect their credit score. This guide will help you understand the relationship between student loans and your credit score, so you can ensure your financial future is as bright as possible.

Type of Debt

The first thing you need to understand when learning about how student loans affect your credit score is that there are two main types of debt that credit reporting agencies evaluate. Credit reporting bureaus use the mix of types of debt in your accounts to help determine your credit score, and understanding what each one is will go a long way towards helping you make sense of your credit score and student loans.

Revolving Debt

The first type of debt that credit reporting agencies evaluate is known as revolving debt. Revolving debt is a credit line with an organization like a bank, in the case of credit cards, or a store, if you have a store-credit card. Most consumers have some revolving debt, and there’s nothing wrong with it by itself. However, the amount of revolving debt you have relative to the limit on all of your accounts is an important factor for determining a credit score. This is known as credit utilization. Ideally, you’ll want to stay under 25% of your available credit.

For example, if you get a credit card with a $10,000 limit, then you can generally have up to $2,500 on the account without causing problems for your credit score. The closer you get to your $10,000 limit, the more your credit score will go down. Credit reporting agencies watch the amount of your revolving credit that you use very closely because it’s a good sign of how easily you’ll be able to pay your bills for new credit or loans.

Installment Debt

The next type of debt that credit agencies look at is called installment debt. Installment debt is a loan that you pay back over time. Student loans, mortgages, car loans, and other similar products are categorized as installment debt.

Credit agencies view installment debt as an investment in the future. Therefore, the amount of installment debt you have isn’t as important as it is with revolving debt. As a result, the amount of money that you owe in student loans isn’t as important as other factors when it comes to your credit score.

However, just like credit agencies look at the percentage of revolving debt you have versus your credit limit, they also evaluate the amount you owe on installment debt against how much debt you originally took out. If your balances for your installment debts are greater than the amount you originally borrowed, then your credit score will suffer. This usually isn’t a problem, so long as you make your scheduled payment on time. In fact, payments are the most important way that student loan debt affects your credit score.

Payments

The biggest impact that student loans have on your credit score have to do with the payments. If you’re making your regularly scheduled payments on-time, then you won’t have any problems with your student loans. However, failure to make your payments can result in huge score drops. Therefore, it’s important to understand your options so that you don’t miss any student loan payments.

Student loans generally have flexible repayment options. Many people are having a hard time finding a job when they first get out of school. Even those that do find a job are discovering that they aren’t making enough to meet all of their obligations. Student loan companies are required to offer a series of different payment plans to help out with this situation. The repayment options are based on your income, and some repayment options can reduce your payment to as little as $0.00. As a result, it’s important to contact your student loan servicer and see what your options are before you miss a payment.

Student loan companies are not allowed to remove entries regarding late payments once they’ve been submitted to credit reporting agencies. That means that one of the most popular credit repair methods, letters of goodwill, aren’t an option for student loan debt.

Other Student Loan Impacts on Credit

While student loans won’t lower your credit score, and the amount of loan debt you have won’t affect what your score is, there are some ways that student loans can affect your eligibility for credit and loan offers.

One of the most important considerations for any company offering loans or credit is a consumer’s debt to income ratio. This ratio shows them how much debt you have against the amount of income you’re bringing in. Even if you’re making all your payments on time and have a perfect credit record, companies realize that it’s extremely risky to lend to someone who has more debt than they can cover with their current income.

Student loans are advantageous in the sense that once you graduate you’ll be able to get a better job. This better job should provide enough income that your student loan debt won’t prevent you from getting loans and credit. However, if your income isn’t high enough to cover your current debts, or is barely enough to cover your current debts, then lenders will be hesitant to offer you new loans or credit.

As you can see, there are a few ways that student loans can affect your credit score. The most important thing to keep in mind is that paying your loans on time will help keep your score up, and even improve it. Student loans are installment debt, and a great way to establish a better mix of credit than simply having revolving lines of credit. Use this information to set up your finances in a way that allows you to take advantage of credit and debt responsibly, and you’ll pay off your student loans in no time!

Sean Michaels

Sean brings a decade worth of experience in credit repair to our company. Sean started his career working in an accounting department for a major credit card company. This was a natural fit, given his bachelor’s and master’s degrees in accounting.