How Can Student Loans Affect My Credit?

Quick Answer

Student loans might help your credit by establishing your credit report, thickening your credit file and adding to your credit mix. Your on-time loan payments can also help you build a positive payment history. However, as with other types of installment loans, missing payments can hurt your credit.

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Student loans can affect your credit scores similarly to other installment loans, such as a mortgage, auto loan or personal loan. However, the student loan disbursement and repayment process can lead to differences. Federal policies and programs—such repayment plans and loan rehabilitation—can also affect how you manage the loans and the impact on your credit scores.

Do Student Loans Affect Your Credit Score?

Student loans can help or hurt your credit scores. The exact impact will depend on how you manage the loan and your overall credit profile, but here's a high-level look at the main ways student loans affect credit scores.

How Student Loans Can Help Your Credit Scores

Your student loans might help your credit scores when you:

  • Make on-time payments. Each on-time payment can help you build a positive payment history, which is the most important scoring factor. Your on-time payments can even help if you're on an income-based repayment plan and have very small monthly payment amounts.
  • Add to your credit mix. Having open installment and revolving credit accounts can help your credit scores because they show you can manage different types of credit. If you don't have any other installment loans, your student loans will add to your credit mix.
  • Pay down the balance. Credit scores consider the portion of your loan balance that's still due. While your credit utilization ratio on revolving accounts is a more important scoring factor, paying down installment loans can also improve your credit scores.
  • Thicken your credit file. A thin credit file is generally a credit report that has fewer than five credit accounts. Lenders often disburse student loans to coincide with the start of a new quarter, trimester or semester, and each disbursement could be reported to the credit bureaus as a separate credit account, or tradeline. Even if you only have one monthly payment, these tradelines can help thicken your credit file, which can also help your creditworthiness.
  • Increase the age of your accounts. Your student loans may be reported to the credit bureaus when they're disbursed, even if you defer your payments. The age of your oldest and newest credit accounts can affect your scores, as can the average age of all your accounts. And your student loans can help increase the length of your credit history over time.

How Student Loans Can Hurt Your Credit Scores

Student loans generally won't hurt your credit scores unless you:

  • Take out a new loan. Applying for private student loans may result in a hard inquiry, which could hurt your credit scores a little—federal student loan applications don't result in hard inquiries. The new loans could also decrease the average age of your credit accounts.
  • Miss a payment. Missing one payment could lead to falling behind on several student loans. Although credit scoring models recognize that these loans are connected and may treat the late payments as a single late payment, even one late payment can hurt your credit.

How Does Paying Off Student Loans Affect Your Credit Score?

Paying off your student loans can be a major accomplishment and is certainly a reason to celebrate. However, you might be surprised to see your credit score drop slightly. It's not always the case, but it can happen for several reasons.

If the student loan was your only installment account, paying off the loan will close the account and could decrease your credit mix. Also, credit scoring companies have found that a borrower who has a loan with a low balance is less risky than a borrower without an active loan.

Regardless of whether paying off the loan leads to a score drop, increase or no change at all, it could help your creditworthiness. Having fewer monthly bills can lower your debt-to-income ratio, which can help you qualify for credit with more favorable terms.

How to Improve Your Credit

Your credit could depend on more than your student loans, especially if you have other loans and use credit cards. Some of the basic steps to improving credit are:

  1. Pay your bills on time. On-time loan and credit card payments can help your payment history. It's also important to stay on top of bills that don't get reported to the bureaus because falling behind and having an account sent to collections can hurt your credit.
  2. Open a credit card. If you don't have a credit card, opening a new card could add to your credit mix and allow you to build credit without paying fees or interest (depending on how you manage the account). Consider student credit cards if you're still in school, or use Experian CreditMatch™ to get matched with credit card offers based on your credit score.
  3. Only use a small portion of your credit limit. Once you have a credit card, try to maintain a low credit utilization ratio by only using a small portion of your card's credit limit. Less than 30% is a good rule of thumb, but 10% or less is even better for your credit scores. Also, try to pay your bill in full each month to avoid interest charges.
  4. Add additional payments to your credit report. You can sign up for Experian Boost®ø and add eligible on-time rent, phone, utility and streaming service payments to your Experian credit report for free. These can help increase your credit score without requiring you to open a new account or manage a new payment.

If you've missed student loan payments and defaulted on your student loans, review the federal programs that might help you get back on track, such as student loan rehabilitation and the Fresh Start program.

Monitor Your Credit for Free

Monitoring your report and score can be a good way to understand how different actions can affect your credit scores. You can get your credit report and FICO® Score for free through Experian, along with free report and score monitoring. Once you create an account, you can also log in to see which factors are helping or hurting your credit score the most.