Student Loans Can Help Your Credit Score — As Long as You Pay on Time

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If you have federal student loans, you may not have to make any payments until May 1, 2022, thanks to the current federal student loan payment freeze.

But just because you’re not making payments now doesn’t mean your student loans don’t matter. Your student loans can have a major impact on your credit score and financial life. Whether that impact is positive or negative will depend on what you do once payments resume.

Though student loans are commonly considered “good debt” — debt that can potentially enhance your life in meaningful and long-term ways — they still are debt and can affect your financial future.

“Student loans can help or hurt your credit score, just like any other type of credit obligation that shows up on your credit report,” says Michelle Lambright Black, a credit expert and founder of CreditWriter.com. “For example, on-time payments on student loans could strengthen your credit score over time. Late payments, meanwhile, could trigger a credit score drop,” she adds.

As long as you make payments on time, though, student loans are more likely to help your credit score than hurt it. Here’s what to know about how student loans affect your credit score — and how you can leverage them to your advantage. 

How Do Student Loans Affect Your Credit Score?

Your credit score is generally calculated using five main factors: payment history, credit utilization (balances owed divided by total available credit), the age of your credit history, your credit mix, and recent hard credit inquiries. 

Your student loans impact your credit score mainly through your payment history, according to Mark Kantrowitz, a higher education expert and author of “How to Appeal for More College Financial Aid.” Payment history accounts for the largest part of your credit score, so late or missing student loan payments can have a fairly big impact on your credit score.

“Late payments can cause your credit score to drop by 50 to 100 points,” says Kantrowitz. “Defaulting on your student loans, which occurs after a 120-day delinquency on private student loans and 270 to 360 days for federal student loans, can have a bigger impact on your credit score.”

Because student loans are considered installment loans, credit utilization does not matter as much as it does with revolving accounts like credit cards, Kantrowitz explains. However, having an installment loan in your credit mix, especially one that helps establish a longer credit history, could be helpful to your overall credit score.

Both Black and Kantrowitz say that private and federal loans affect your credit in similar ways. “From a credit scoring perspective, there’s no difference between a federal and a private student loan,” says Black.

It’s important to note that your credit score isn’t the only part of your financial profile that student loans affect, says Kantrowitz. They can also impact your debt-to-income ratio, making it harder to qualify for a mortgage. However, recent changes to mortgage underwriting rules for certain government-backed loans mean that borrowers on an income-driven repayment plan may have an easier time qualifying for a mortgage compared to before, Kantrowitz says. 

Will My Credit Score Worsen If I Miss a Monthly Payment?

Because of the importance of payment history, each missed student loan payment — private or federal — can have a significant negative impact on your credit score. 

However, Black points out, your private lender or your federal servicer has to report you as “late” before the action affects your credit. “With private lenders, that could happen when you reach the 30-day past due mark,” Black explains. “Federal student loan servicers, by comparison, typically don’t report you as late to the credit bureaus until you’re 90 days past the due date.”

Even if you aren’t being reported, though, you could still face negative consequences from your lender or servicer in the form of late fees or penalties. These may be added to your loan balance and accrue further interest, causing your debt to grow. That’s why it’s important to always make your payments on time, if possible. 

Late payments can stay on your credit report for up to two years, Kantrowitz says, even after you resume payments and bring your account current. “However, recent activity has a bigger impact on your credit score than older activity,” he adds. “So there should be an improvement in your credit score even within a few months of bringing the account current and resuming payments.”  

Pro Tip

Reduce the chance that you’ll miss a loan payment by signing up for AutoPay. Many lenders even offer an interest rate reduction for enrolling in AutoPay.

Can Student Loans Help Improve Your Credit Score?

While missing student loan payments can lower your credit score, consistently paying on time helps build a positive payment history, says Black. 

Adding another account to your credit report can also help you if you have a thin credit file, Black adds. Having a student loan could improve your credit mix, which makes up 10% of your FICO score calculation. A good credit mix could increase your credit score and show lenders that you’re able to handle multiple types of credit.

And, as time passes and your student loan gets “older,” the average age of your credit accounts increases, which can also provide you with a small credit score boost

Of course, this all depends on you regularly making payments on time. Kantrowitz recommends setting up AutoPay with your private lender or federal loan servicer. That way, you won’t have to try to remember to make your payments each month, and you reduce the chances that you’ll end up paying late or — worse — missing payments altogether. 

“Not only are you less likely to be late with a payment, but many lenders offer an interest rate reduction when you enroll in AutoPay,” Kantrowitz says. “You typically see a 0.25 or 0.50 percentage point reduction as an incentive.”

Do Student Loans Affect Credit Scores During the Student Loan Freeze?

As part of the federal government’s pandemic relief measures, federal student loan payments have been frozen. During this time, certain loans don’t require payment and they don’t accrue interest. On top of that, collections have been paused on defaulted loans. The latest extension of this payment freeze is set to expire on May 1, 2022. Although there could be additional extensions in the future, you shouldn’t count on them when planning ahead.

During the freeze, you won’t be penalized for not making payments, which means your credit score won’t be affected. However, if your loan was in default prior to the freeze, it will still show up on your credit report and impact your credit score, even if collections attempts have stopped.

It’s important to note that not all loans are impacted by this freeze. Private student loans aren’t affected. Additionally, nondefaulted loans from the FFEL program that aren’t held by the Department of Education aren’t eligible.

Whether you have federal or private student loans, it’s important to address repayment issues as early as possible. Borrowers who are struggling financially should contact their loan servicer to ask about their options rather than let their loans go into default, says Kantrowitz. These options can include deferment and forbearance, partial forbearance, reduced interest-only payments, and alternate repayment plans

Ultimately, the best way to keep your credit score healthy and your debt under control is to stay on top of your student loan payments — whether this means paying the amount due on time every month, or contacting your lender as soon as possible and working out an alternate agreement if you can’t pay.