Having student loan debt will affect your credit score, but not always in the way you think. If you consistently make your loan payments on time, having student loans can actually boost your score. But if you pay late—or worse, if you stop making payments altogether—your credit score will take a major hit.
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, including whether you've paid on time. Creditors use this information to determine your creditworthiness (meaning, whether you are likely to repay a loan if they give you one).
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. The score is based on the information that’s in your credit reports. (Learn about the difference between a credit report and a credit score.)
Many credit scoring companies exist, but the one most creditors use is FICO. A FICO score, which ranges from 300 to 850, is calculated based on several different pieces of credit data in your credit report. The score takes into account both positive and negative information in your credit report. Late payments will lower a FICO score while making on-time payments will raise the score.
Merely 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.
Student loans are considered an installment loan. Installment loans have a starting balance that you must repay over time with a fixed number of payments. Mortgages and auto loans, along with federal and private student loans, typically fall into this category. Generally, if you're late in making your payments or if you stop making payments on an installment loan, the creditor will report the delinquency to the credit bureaus and your credit score will go down. With federal student loans, the servicer will generally start reporting the delinquency once you're more than 90 days late.
Because your payment history is the most crucial factor in calculating your FICO credit scores (you have more than one), failing to make your student loan payments will have a severe effect on a score. Just how much your credit score will fall depends on a variety of factors, like how high your score is to begin with and how long you're delinquent.
If you’ve missed a payment or think you might have trouble making your upcoming payments on a federal student loan, it’s important not to panic. You probably have time to avoid damaging your credit score too badly. You can request a deferment, you might have forbearance options, or you might be able to get a more affordable repayment plan so you can keep paying on time. (If you have private student loans, call your loan servicer to learn about different options if you can't afford your payments.)
If you’re already in default, you can get some credit reporting benefits if you rehabilitate or consolidate the defaulted federal student loan. Once you successfully rehabilitate your defaulted loans, the credit reporting agencies will remove the default from your credit history. Your history of late payments before you entered default status, however, will remain on the report. If you consolidate with a Direct Consolidation Loan, the negative history for your old loan will stay on your report until it’s too old; but your report will show you as current on your new consolidation loan—as long as you make on-time payments for the new loan.
Contact your loan servicer, or a student loan attorney, to find out more about what options are available and appropriate in your situation.