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How Student Loans Affect Your Credit Score

You put a lot of energy into getting a solid education. And yes, you racked up significant student loan debt at the same time. Now you’re ready to take some big financial steps, and you’re wondering whether that debt load will be a barrier.

Your student loan debt is part of the total debt picture lenders will look at when they’re determining your creditworthiness—whether you’re applying for a credit card, a car, or a mortgage.

So how can student loans raise or lower your credit score? Let’s take a closer look.


Student loans can actually increase your credit score

Your credit score is based on payment history and debt totals as reported to credit bureaus. The bureaus consider potential new debt, reports of debt being sent to collections, and how long you’ve been had credit.

A long history of on-time payments can improve your credit score and is exactly what lenders are looking for. So if you’ve been making regular monthly student loan payments, you may have a higher credit score to show for it.

Making late payments negatively impacts your credit score

The flipside? Missing payments or defaulting on your student loans will negatively impact your score.

Remember, on-time payments are the most important factor in how your student loans are treated in your credit score. If you’re concerned about staying current on your student loans, consider looking into how refinancing can lower your monthly payments so you can stay on track.

Monthly payment amounts matter more than remaining student loan amounts

You may think that a longer repayment term and low monthly payments, such as those you’d pay under an income-driven plan, would count against you since you’ll have a bigger debt balance for a longer period of time. But a lower monthly payment can actually be a valuable asset.

Student loans, like mortgages and car payments, are installment loans. These are loans where the amount owed each month remains relatively constant. They’re treated differently than revolving loans, like credit card balances, where the amount may change from month to month.

Why? Because lenders care more about your monthly payments than the total amount owed. When you’re applying for additional credit, lenders just want to know that you’ll be able to afford to pay the new loan that you’re applying for.

Having lower monthly payments on your student loan means you have a lower debt-to-income ratio, a number lenders use to determine how much of your income is already designated for paying existing debts.

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Reducing credit card balances before paying off student loan debt may be wise

High credit card balances are scored differently than student loan balances. Maxing out your credit cards is considered negative financial behavior. Having a student loan isn’t.

As you pay down credit cards, your score will rise and you’ll be more likely to get approved for new loans.

Seeking new student loans can hurt your credit score—but only slightly

When you’re shopping for a new private student loan—whether you’re returning to school or refinancing for a better interest rate—your score might drop by a few points.

You can minimize the impact by limiting your comparison shopping to a 15-day timeframe. And, you’ll be less likely to see interest rates change if you make a timely decision.

You can recover

As we noted above, paying on-time is the single most important thing you can do to maintain or improve your credit score. But even if you’ve missed a payment, don’t let that send you into a tailspin.

Your credit score can improve with every subsequent on-time payment. And if you’ve missed a payment, that’s a good reason to reassess your budget. Consider asking your federal student loan servicer or private loan lender about repayment plan options or a temporary authorized break from payments.

To find out how much you could save by refinancing your student loans, see our Student Loan Refinancing Calculator

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