Even if you don’t know too much about how credit scores are calculated, you may be aware that paying off debt in a timely manner is one of the best ways to build good credit. Late and missed payments can have a negative impact on your credit. And by extension, the way you manage your student loans could also boost or harm your credit.
Why Does Your Credit Score Matter?
Lenders look at your credit score when evaluating your credit card and loan applications. Better credit could increase your likelihood of qualifying for a loan with a low rate and a decent term. Your credit profile can also impact your ability to get an apartment and your insurance costs. Thus, working to improve your credit is a worthwhile effort.
How Different Types of Debt Can Affect Your Credit
What you may not know is different types of debt affect your credit in different ways. For instance, the balances carried on credit cards are called revolving debt. Lines of credit also fall into this category. This type of debt includes a maximum limit and accounts are considered “open-ended”, meaning you can pay them down and borrow against them again.
Then there are installment credit accounts, including loans for houses, cars, and college tuition. Funds from these accounts are typically disbursed as a lump sum, and the accounts are non-revolving and have set repayment terms.
Both revolving and installment debt can affect your credit. Revolving debt is potentially more damaging because it’s factored into your credit utilization, or the amount of revolving credit you’re using relative to your total limit. In general, the lower your credit utilization, the better for your finances.
Although revolving credit accounts impact your credit utilization, installment loans can also impact your credit both positively and negatively. Here’s how student loans can impact your credit score.
How Can Student Loans Help Your Credit?
When managed responsibly, student loans, as with any type of installment loan, could boost your credit rating. While amounts owed account for 30% of your FICO credit score, payment history is actually more important, comprising a whopping 35% of your credit score.
So if you make your monthly student loan payments on time and in full, you should be able to steadily build good credit over time, especially when you take the same care with all your other financial obligations.
Your student loans will also impact your credit mix, accounting for 10% of your credit score. Generally, a healthy mix of revolving and installment accounts can work in your favor. So if you only had a credit card before taking out student loans, your credit mix likely improved when you borrowed.
How Can Student Loans Hurt Your Credit?
Unfortunately, student loans can also harm your score if you don’t manage them responsibly, and even a relatively small hiccup with payments could cost you.
Juggling many student loan payments associated with years of schooling can be challenging, and sometimes a payment might slip through the cracks. When this happens, it could harm your credit. Even worse, the better your credit score, the more a late or missed payment could impact you, according to MyFICO. This is because a higher score reflects less risk.
If you’re considering private student loans to close a funding gap for school, your initial loan application may also ding your credit score by a few points. Your lender will do a hard credit check when you submit an application, and this check can lower your score slightly. But the minor harm is usually temporary.
How Can You Improve Your Credit Score While Paying Off Student Loans?
Even if you’ve managed your student loan payments well, refinancing student loans may provide worthwhile benefits. If you currently juggle several monthly payments and you’re worried about missing a payment somewhere along the line, you could refinance your student loans into one convenient payment.
In some cases, you might even save money by refinancing student loans if you’re able to reduce your interest rate. It depends on your situation, but it’s something to consider when you’re thinking about how student loans impact your credit score.
