Sadly, a lot of students don’t know the first thing about their credit score(s), despite their great importance.
While it’s typically fairly easy to get a student loan, even if your credit history is sparse, it’s important to note the impact one can have on your credit scores going forward.
Put simply, any loan you have out in your name will appear on your credit report. And because it’s an active loan on your credit report, it will impact your credit score.
(What bills affect my credit score?)
There’s no way around it. However, this isn’t bad news. The presence of student loans can be very helpful in establishing credit.
This early credit building can also facilitate future credit requests, making it easier to get a car loan or a buy a home down the road.
How Student Loans Affect Your Credit Score
As mentioned, student loans appear on your credit report alongside other loans.
They are installment loans, meaning the balance is fixed and must be paid off in a certain amount of time, such as 10 years.
For example, you may have $10,000 in student loan debt and a minimum payment of $50, but the total balance must be paid off when the loan term ends.
Conversely, revolving loans such as credit cards allow you to carry a balance up to your credit limit, and don’t have a set term, meaning you can carry a balance forever, so long as you make at least the minimum payment.
Each time you make a student loan payment, it will be registered by the credit reporting agencies and the payment history will show up on your credit report.
Assuming you make an on-time payment, this action will help your credit score. In short, timely payments show other creditors that you’re a responsible borrower.
However, if you miss a payment, this too will be recorded on your credit report and your credit score will drop as a result of the “irresponsibility.”
So clearly it’s very important to make on-time student loan payments, just as you would any other loan.
Also note that student loan debt eats into your credit utilization. So if you’ve got $50,000 in outstanding student loan debt, it tells prospective creditors that you’ve already got quite a hefty monthly debt obligation.
And taking on more credit, in the form of a car loan, credit card, mortgage, etc. may push you over the brink.
That’s why it’s important to pay down your student loans to free up your credit capacity.
Over time, as your student loans are paid down, your credit score should rise, thanks to both on-time payments and the reduced outstanding balance.
Tip: Mortgage lenders will take your student loan debt into account, and this can push your debt-to-income ratio beyond what is allowable. So paying down the loans is paramount to ensure there aren’t financial roadblocks in the future.
Credit Score Needed for a Student Loan
If you’re seeking a private student loan, a credit check will be performed. So if your credit history is thin, or worse, non-existent, you may have to look at federal student loans instead.
You can obtain a federal student loan without a credit check or a co-signer, which is a huge plus for the credit impaired.
But the obvious advantage to having a solid credit history is getting a student loan with a lower interest rate and better terms.
If your credit history is light, consider asking someone such as a parent to co-sign so you have more options.
The more options you’ve got, the better chance you’ll have at securing a lower interest rate, which means you’ll pay a whole lot less over the years.
Read more: What is a good credit score?