How Do Student Loans Affect Your Credit Score?

Student loan debt can impact your financial profile, credit history, and credit score – either in a detrimental way or by improving your financial status and ability to save money. It all depends upon how you manage that student loan debt, and whether you are able to make your payments on time to fulfill your obligations as a responsible borrower.

What makes up my credit score?

Lenders and other creditors depend on credit reporting agencies to keep tabs on your credit history so that when you apply for a loan, they can see your track record for repayment. Banks and lenders also use your credit score – which is using a number to quantify your creditworthiness – as a quick snapshot that they use to evaluate how risky it may be to make a loan to you.

The lower your score, the higher the risk a creditor may perceive you as to making on-time payments. On the other hand, a high score usually indicates that you are a reliable and responsible borrower. If you do not yet have much history as a borrower, a student loan gives you an opportunity to begin building good credit. If you already have established credit, you can leverage repayment of your student loan debt to raise your financial profile even higher.

Who tracks my student loan payment history?

There are three major credit bureaus – Equifax, Experian, and TransUnion. They receive updates from creditors, including student loan lenders, and relevant information goes into your credit file where it can be viewed by authorized parties such as mortgage companies, credit card issuers, and lenders who handle auto and consumer loans.

In some cases, employers or potential employers may also ask for your permission to access your credit history.  According to a survey of 1,528 Human Resources professionals, 25% use credit or financial checks while hiring for some positions. That is another incentive to proactively manage your student loans, since they may influence your career opportunities.

What are the risks of student loan payment default?

If you make a late payment, miss a payment, or default on a student loan, it can undermine your score and potentially create serious financial problems. A student loan default will likely remain in your credit report for seven years, weakening your credit score. If your financial profile is damaged, you may receive higher interest rates on future lines of credit or you may have a tough time getting approved for future credit altogether.

Defaulting on a student loan can trigger other consequences like having the debt turned over to a collection agency or sometimes even having your wages garnished to repay the obligation. You may also incur legal fees and court costs. If the situation is bad enough your tax refunds could be taken along with any professional licenses that you hold. If you are a doctor, lawyer, or teacher, for example, defaulting on a student loan could jeopardize your ability to maintain the license required for you to work.

What can I do to strengthen my credit score?

With a strong credit profile, you can borrow more easily, at lower and more attractive interest rates with preferential terms. Payment history comprises about 35% of your total score, so having a record of consistent, timely student loan payments enhance your score and financial profile.

If you have graduated and are looking to lower your current student loan interest rate, monthly payment, or just combine all of your student loan payments into one, you may want to consider refinancing your student loans.

Student loans can help boost your credit score if you make on-time payments or it could hurt your credit score if you choose not to. Understanding the importance of how your student loans can shape your credit score is an important step in building your financin