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How student loans impact credit scores


The average Class of 2014 with student loan debt has $33,000 to pay back, earning them the distinction of the most indebted class ever. That means 70% of students graduating with a bachelor’s degree are leaving school with student-loan debt.

Even after adjusting for inflation that’s nearly double the amount borrowers had to pay back 20 years ago according to analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of web sites about planning and paying for college.

One problem many grads face is entering a job market with fewer opportunities for them to use their degrees and, in turn, pay back their loans. This problem leads to how student loans impact credit scores.

Student loans on credit reports

When students are in their 20s, student loans play an important role in establishing much of their credit scores. That’s because the Credit CARD Act of 2009, changed credit card approval rules for college students and recent grads – making them stricter. To qualify for a credit card, students need to prove they have a steady-enough income to handle make payments. Many fresh-out-of-college job seekers don’t meet that criteria making student loans often the only source of establishing a credit history.

Student loans are “installment” loans

Two different loan types are used to calculate FICO scores – installment and revolving.

Installment loans are a fixed loan amount that you pay back on a regular payment schedule over a predetermined amount of time. Auto loans, mortgages, and student loans fall into the installment credit category.

Revolving loans work a little differently. Instead of a fixed loan amount, revolving loans give borrowers a credit limit—how much of that limit borrowers use is up to them, and the payments change depending on how much the borrower charges every month. Credit cards are prime examples of revolving loans.

This means you can have a large amount of student loan debt without hurting your credit scores, unlike high revolving debt which will decrease your credit scores.

On-time student loan payments most important

Payment history already makes up the largest portion of your score factors – 35%. But the effect is even more prominent when your credit history is short or only includes student loans. Monthly payments must be on time, every time, or you risk doing damage to your credit scores. When a student loan is the only information on your credit report, your scores will severely feel the impact of missing even one payment.

Student loans add to your credit “mix”

Having different types of credit on your reports known as the “credit mix” is important. A healthy mix of credit determines 10% of your scores. If students have credit cards (revolving credit) along with student loans in their credit files it helps your credit score.

But the less information on your credit report, the bigger factor it plays. A young grad with a thin credit history can benefit from having an “installment” student loan on her credit report, because responsibly managing it demonstrates that she has experience dealing with different types of credit.

Student loans can help you qualify for credit cards

Young graduates who have not established a solid credit history can be helped by a strong payment history of on-time student-loan payments. Timely payments can help build your credit and improve your chances of qualifying for a credit card when you do apply.

Late Payments on Student Loans

Making late payments—or missing them altogether—can lower your credit scores, causing a ripple effect where you will not be able to qualify for other types of credit. One option to consider if you are unable to make payments is forbearance. It allows you to temporarily postpone payments. Unlike deferments, forbearances may be granted if you are already in default. But forbearance is generally not as helpful as a deferment because interest continues to accrue while the loan payments are postponed. Take all things into consideration when choosing forbearance because it can be expensive.

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