Having student loan debt will affect your credit score, but not always in the way you think. If you consistently make on-time student loan payments, your student loans can boost your credit score. But if you pay late, or default, on student loans, your credit score will take a hit.
Understanding Credit Reports
As a starting point, it's helpful to understand the basics about credit reports. A credit report provides a record of your borrowing and repayment history. Along with your personal information (like your name, recent addresses, Social Security number, and birth date), the report contains details about your various accounts, such as mortgage, credit card, car loan, and student loan accounts.
For each account, the report will include:
- the type of account
- the date you opened the account
- your credit limit or amount of the loan
- the loan balance, and
- a record of whether or not you've paid on time.
The report will also show a record of credit inquiries from lenders, landlords, or others who ask to see your report, as well as public records about any liens, bankruptcies, and overdue child support. (Learn more about your credit report and credit score.)
Creditors use this information to determine your creditworthiness (meaning, whether you are likely to repay a loan if they give you one).
Companies That Compile Credit Reports
There are three major credit reporting companies (called credit bureaus) that compile credit reports are:
Understanding Credit Scores
A credit score is a number that supposedly measures the risk that you will default on credit payments.The higher your score, the less likely you are to default, and therefore the better the credit risk.
There are many credit scoring companies, but the one many creditors use is FICO. Your FICO score, which ranges from 300–850, is calculated based on several different pieces of credit data in your credit report. Your score takes into account both positive and negative information in your credit report. Late payments will lower your FICO score, while making payments on time will raise your score.
You can get your credit score for free in certain situations. Or you can pay for it. However, paying for a credit score is often a waste of money. (Learn more in Should You Pay to Get Your Credit Score?) Because your score is based on the same types of information found in your credit report, you can get a good idea of how creditors will view your credit-worthiness by reviewing your reports.
How Student Loans Affect Your Credit Score If You Stay Current on Payments
Simply having student loan debt will not negatively impact your credit score. In fact, if you make on-time payments, student loans can positively impact your score for several reasons.
- Builds payment history. According to FICO, your payment history makes up 35% of your score. So having a record of consistent, timely student loan payments will boost your score.
- Adds credit diversity. FICO likes to see a mix of credit types. Credit diversity makes up 10% of your score. So having student loans along with other debts (like your mortgage and credit cards) is a good thing.
- Increases the length of your credit history. Length of credit history accounts for 15% of your score. If you've been paying on a particular student loan account for a number of years, that will help your score. (Learn more about what goes into your FICO score.)
Student Loan Deferments and Forbearances
With a student loan deferment, you don’t have to make student loan payments for a set period of time because of a specific condition in your life -- such as returning to school, economic hardship, or unemployment. If you don't qualify for a deferment, you may be able to get a forbearance. With a forbearance, your loan holder permits you to stop making payments for a certain amount of time or to temporarily reduce payments. (Learn more in Nolo’s article Student Loans: Cancellation, Deferment, and Forbearance.)
Getting a deferment or forbearance on your loan won’t hurt your credit score since they are treated as being “paid as agreed” for scoring purposes.
How Defaulting on a Student Loan Affects Your Credit Score
If you stop making payments (default) on your student loan, your credit score will go down. Late student loan payments will hurt your score in much the same way as late payments on any other type of account.
A student loan default will typically stay on your credit report for seven years.
Consequences of Defaulting on a Student Loan
If you default on your student loan, a number of things could happen, such as:
- Your loan may be turned over to a collection agency.
- Your wages could be garnished. (Learn how much of your income you could lose to a student loan wage garnishment.)
- You could be sued for the amount due, plus costs associated with collecting your loan, such as court costs and attorney fees.
- Your federal and state tax refunds could be seized.
- You may not be able to renew a professional license you hold.
It's difficult to discharge (wipe out) a student loan by filing bankruptcy. (Learn more in Nolo’s article Student Loan Debt in Bankruptcy.)
Consequences of a Low Credit Score
A low credit score will affect your ability to get a mortgage to purchase a home, find a job, obtain a car loan, or get credit cards.
- Getting a mortgage loan. In some cases, a low score could prevent you from getting a mortgage altogether. If you do get one, the terms will probably not be in your favor.
- Future employment. A potential employer may look at your credit score when considering hiring you. You may have a hard time getting a job if you have bad credit. (This, of course, depends on the employer and, to some extent, the reason for the low score. For example, if you are applying for a job in the financial services or banking industry, a bad credit report may very well affect your ability to get the job since the potential employer may think that you are not able to competently handle finances.)
- Getting a credit card or car loan. A low credit score can result in a much higher rate of interest than the prevailing market rates when you get a credit card or car loan, and can also result in you being denied credit in some circumstances.