Student loans have the same effect on your credit score as other types of loans, such as credit cards, car loans or mortgages. Like any other loan form reported on your credit report, your credit score may fluctuate depending on your student loan payment habits.
Your credit score is calculated using five components:
- Payment history: 35 percent
- Length of credit history: 15 percent
Student loans can help you establish a credit history, which can be a great asset in the future. It's good news if you can show that your credit history began when you started college, instead of establishing it at age 26 if you never got student loans. The longer your credit history and the higher your score, the less impact some late payments will have (on anything).
Student loan payment history
Payment history makes up the bulk of your credit score, so paying off loans on time makes a big difference. Making your student loan payments on time steadily helps increase your credit score.
If you do not make student loan payments on time, expect to see a decrease in your credit score. The damage caused to your score will depend on other debts you have and your payment history with them.
Suppose you have student loans, a credit card and a car loan. Make timely payments of credit card and car loan, but not student loans. In this scenario, your credit score is impaired, but not as much as if you only had student loans and did not repay them.
How student loans improve your credit mix
Of course, some college graduates have more than one mix of credit with credit cards and car loans. Some may even be making mortgage payments. In any case, timely student loan payments, other types of loans and credit cards are good for your credit score.
How student loans impact the amount owed
As for the amounts due, student loans are installment loans instead of revolving loans such as credit cards. The less you have to pay for a student loan, the better. This part of your credit score helps you pay more than five years than at the beginning.
How to pay student loans on time
Making student loan payments on time may not always seem possible, but late payments hurt your credit score. For loans backed by the federal government, take advantage of the various payment plans instead of skipping payments regularly. For example, a payment plan based on income Consider the size of your home and the amount of income. Meanwhile, a graduate plan forces you to make lower payments at the beginning, and gradually increase. Whenever you make your payments on time, regardless of the plan, your credit score should not be affected.
The situation is more complicated for private student loans. However, you can explore refinancing or consolidation options. You can also do it with loans backed by the federal government.
How refinancing or consolidation of student loans affects credit
There may come a time when you want to refinance or consolidate your student loans, especially if your interest rate will be significantly reduced. Refinancing or consolidation can also:
- Streamline payments so that only one entity pays.
- Reduce your monthly payments (even if you increase in general and extend your payment period).
- Get a fixed and predictable interest rate.
There are good reasons to consolidate some loans and not others. For example, if you lose valuable benefits on a loan, such as repayments on the principal, you may want to skip consolidation of that specific loan.
Regardless of how many student loans you consolidate or refinance, there could be a direct effect on your credit score. This is because difficult credit inquiries reduce your score. The impact is minimal if you have requested a refinancing or consolidation with only one company, but if you have requested many, the cumulative effect can be excellent. Your score could even fall from 20 to 50 points, depending on the number of applications and how recent they have been.
Of course, consolidating or refinancing your loans can make them more accessible. When you make payments on time, your credit score increases.