How Do Student Loans Affect Credit Score?

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It does not matter whether you have a big or a small loan to pay back, you are likely to worry about your future.

Your credit score determines employment interviews, insurance rates, auto loans and home mortgage. Moreover, the credit score might also affect the interest rates for some of these loans.

A poor credit score can increase the chances of rejection of your application. Another scenario is that the banks can charge extra interest rates due to a bad credit score.

To further explore this topic in detail, let’s take a look at how student loans affect credit score.

Student Loans

These loans are actually installment loans. To define an installment loan, we can say that its total amount is paid over some fixed time through installments. Auto loans and home mortgages are normally categorized as installment loans.

The Effect of More Student Loans on Credit

It is not necessary that more student loans will hurt your credit. Normally, balances of a student loan are not treated in the same way as revolving credit balances. For example, you have a credit card debt of $10,000. Now, this is worse than having a student loan debt of $10,000.

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Although your balance does not have a big impact on your credit score, it can influence your eligibility to borrow other loans. Your loan request might be rejected if your debt-to-income ratio is high.

It All Depends on Your Monthly Payments

In case of student loans, your monthly payments have a significant effect on your credit score. That is why it is recommended to make full payments on the due date.

Generally, 35 % of your FICO score is dependent on your payment history. Only a single late payment can adversely affect your credit score.

Student Loans Could Help Your Credit

Although it is not advisable to take on debts for improving your credit score, it is still preferred to seek student loans.

Credit mix is a part of the FICO calculation. This factor considers your credit lines and the different types of loans that you have borrowed. Your credit mix can be positive due to a mixture of revolving and installment loans on your credit report.

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Even after paying off student loans, you can still see an entry on your credit report. Though, it is likely that you might see a slight drop in credit score if a student loan is your only installment loan. Still, it is not wise to avoid the repayment of student loans to maintain your credit score.

The Three Major Takeaways

  • Try to make full payments of your student loan on time. It has a significant effect on your credit score so make sure that you follow this tip.
  • Your credit score is not automatically considered poor due to more student loans.
  • Finally, you should know that student loans are just like other loans for your credit score.

 

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