How do student loans affect your credit score?

By Zina Kumok, Financial Health Counselor, Credit Counselor

With most life lessons, you get to dip your toes in the water before taking a full plunge.

  • Before signing a lease or owning a home, you practice living on your own in a dorm.
  • Before starting a career, you practice doing chores and eventually part-time or summer work.
  • Before marriage, you date and then go through the engagement process.

But when it comes to credit, many people’s first dip is more like a belly flop.

Student chained to debt

Student loans are often the first, and one of the largest, forms of debt people encounter.

Before students are even old enough to drink, they’ve taken out tens or even hundreds of thousands to fund their education. It’s crucial for anyone in this position to understand how the choices they make will affect their long-term financial health.

The most important thing to understand is your credit score - why it’s important, how your student loans will affect it and what you can do to avoid unwanted consequences. Here’s everything you need to know.

How Credit Reports Work

Once you take out student loan debt, it’ll show up on your credit report.

Your credit report is a financial report card that shows how reliable you are as a borrower. Any time you have an open loan or line of credit, it will appear on your credit report. (See our article about how to read a credit report.)

Credit bureaus use a secret algorithm to calculate your credit score, which is a rating of your creditworthiness between 300 and 850. Credit bureaus use the information from your credit report to calculate your credit score.

Credit scores only focus on debt, and don’t factor in other aspects of your financial health. They won't show how much you save, what you earn or how well you budget. It's just a number that lenders use to determine how reliable you are as a borrower.

What Type of Credit Is A Student Loan?

Student loans are what’s known as an installment loan, just like a car loan or mortgage.

Installment loans have a set period of time in which to be repaid and regular monthly payments.

This is different than a credit card, which is a form of revolving credit. With revolving credit you have an ongoing limit on the amount you can use each month, but your usage may vary from month to month.

About 10% of your credit score is influenced by the types of credit you have. So having a student loan in addition to a credit card could help your credit score – as long as you’re responsibly managing both.

How Does My Credit Score Affect My Ability to Get A House, Car or Job?

Having a good credit score is essential if you want to buy a house, take out a car loan or borrow money to start a business.

A high credit score will also give you access to the best travel rewards credit cards, earning you free flights, hotel stays and more.

If you don’t have good credit, you’ll pay higher interest rates or have to put more money down when taking out a loan. A low credit score can even get your rental application denied.

In some cases, you can even be turned down for a job if you have poor credit and your position would involve managing money or has security requirements.

How Student Loans Affect Your Credit

For many graduates, the first thing that pops up on their credit report is their student loans.

It's difficult and often impossible to get any form of credit before the age of 21 - unless you have a regular source of income or are an authorized user on a parent’s credit card - so for most borrowers, student loans are their introduction to the world of credit.


Will Student Loans Help or Hurt My Credit?

Student loans don't necessarily affect your credit for better or for worse, whether you have federal loans or private loans. Making the loan payments on time (or not) has the biggest impact on your credit score.

If you're a responsible borrower and pay your bills on time, your credit score will increase. If you default on your loans or have them sent to collections, your credit score will drop.

The easiest way to improve your credit score with student loans is to make on-time payments - pay every bill, on time, every month.

Thirty-five percent of your credit score comes from your payment history.

If you're struggling to do so because your student loan payments are high, consider picking an income-based repayment plan which will lower your monthly bill and extend your loan term.

It's better to pay off a little bit at a time over a long period than to have higher payments that you struggle to make consistently. The repayment option you choose doesn't matter for your credit report, as long as you pay by the deadline.

The best way to prevent any late payments is to set up autopay, where the lender will automatically deduct the payments from your bank account every month.

With autopay, you'll never miss a payment out of pure forgetfulness. If you don't like using autopay, you can also set up calendar reminders in your phone.

Does the Amount of My Student Loan Impact My Credit Score?

The size of your loan doesn’t necessarily matter for your credit score. It’s more important that you make your payments on time.

Amounts owed are a big contributor to your credit score (about 30%), but the credit scoring models tend to focus more on your utilization of your revolving credit, like credit cards.

The amount you owe may come into play if you try to get approved for a car loan or mortgage since lenders typically look at your debt-to-income ratio.

In other words they are looking at the ratio of your monthly obligations to your monthly gross income.

So if you have student loans plus rent, you’re more likely to have a higher debt-to-income ratio than if you didn’t have student loans. Lenders are typically looking for a debt to income ratio of 36% or less (in other words less than 36% of your monthly income is already committed to something).

Other Considerations

Will Refinancing Student Loans Affect My Credit Score?

If you have the opportunity to lower your interest rate and decide to refinance your student loans, your credit score will temporarily take a slight ding.

Every time you take out a new loan or refinance an existing loan, the new lender will have to do a hard inquiry on your credit report.

Each hard inquiry can decrease your credit score by a few points. If you have several hard inquiries on your report, you might be denied for new credit applications.

A hard inquiry will only affect your credit report for a year, after which it will no longer factor into your score. If you want to refinance, apply with a few different lenders at the same time so the hard inquiries occur all at once.

Don’t apply for any other loan products or credit cards before you refinance so your credit score doesn’t suffer.

Will Student Loan Forgiveness or Early Repayment Affect My Credit Score?

If your loans get forgiven or you repay them early, you might see your credit score drop.

Credit scores sometimes drop after you pay off a loan because it decreases the total number of credit accounts. The drop will usually be minimal and not enough to disqualify you from any other loans.

Don’t let a temporary credit score drop discourage you from paying off your loans early. Not everyone notices a difference, and your score will eventually rebound.

The best way to maintain a good credit score after you’ve repaid your student loans is to have at least one open and active credit card. Use the credit card every month for a few small purchases, and pay it off after the monthly statement posts. Make sure your total balance is never more than 30% of the card’s credit limit, or your credit score will suffer. Set up autopay or calendar reminders so you don’t miss a payment. Using this simple strategy will keep your score high after your student loans are paid off.

About the Author

Zina Kumok writes extensively about personal finance and is a Financial Health Counselor and Credit Counselor, certified by the National Association of Certified Credit Counselors.

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Written on July 11, 2016
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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