Does a Student Loan Hurt Your Credit Score?

 April 27, 2017

Taking out a student loan is a big decision. It may be the first big debt that you’re taking on. While it is crucial for you to understand how much you will pay each month and over the life of your loan, there are other things you need to consider, too. Pay attention to how your student loan affects your credit score, credit history, debt-to-income ratio, and your ability to get a loan down the line.

Most student loans are Federal student loans. Unlike private student loans (and other loans like a mortgage or auto loan), Federal student loans usually are based on need, not on your credit score. You can get a Federal student loan before you have established a credit score or history. This can be great, as it allows you to pay for an education, but it can be dangerous, too.

So does a student loan affect your credit score? The short answer is yes, a student loan affects your credit score. Here are answers to common questions readers ask about about their student loans and credit scores.

  • Do Student Loans Show Up On A Credit Report and If So How?
    Student loans are like any other type of loan: lenders have the option to report them to the consumer credit reporting agencies, which include Equifax, Experian, and TransUnion. Lenders typically report this information, but are not required to do so. Student loans impact your report like any other loan. This means if you show a history of on-time payments, the impact is positive. If you make late payments or default on your loan, the impact is negative.
  • Can Loan Deferment Hurt My Credit Score?
    As long as your student loan isn’t in default, there is no negative effect on your credit score. Since you usually aren’t paying on it until you graduate, it shows as current on your credit report. In fact, this can be a positive thing, especially when it comes to getting other short term loans.Some banks take deferments into consideration when lending, and not having to make payments on a student loan gives you more discretionary income and lowers your debt-to-income ratio.
  • How Will My Student Loan Be Reported?
    Unlike credit cards which are revolving credit, student loans are reported as installment loans on credit reports. Student loans can improve your credit score in many ways. Creditors like to see a variety of different kinds of credit on your report, so having installment loans show the diversity of your loan history. The credit scoring models FICO and VantageScore reward loan diversity.
  • Does a Student Loan Appear in My Credit History?
    Student loans have positive affects on your credit score, but also negatives. On the plus side, it establishes a loan history, which for many people with no credit history or a negative credit history is hard to do. While not a major impact, a student loan is considered “good debt” because rather than using credit for luxury purposes, a student loan is used because you are investing in education, to get a better, higher-paying job. This investment in the future looks good when banks and other lenders review your credit report.
  • Should I Repay My Student Loan Early?
    Generally, yes, if you can afford to repay your loan early you should do so for two reasons. First, it reduces your debt-to-income ratio, which is an important measure of your financial health. Second, it cuts your interest costs.

A student loan will affect your credit score in a positive manner as long as you make your payments on time. But the opposite is also true. Don’t let the fear of harm to your credit score be your only reason to avoid one.

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