Do Student Loans Help or Hurt Your Credit Scores?

Preparing for college is hard work. You study diligently for the SAT or ACT. You earn the best grades possible so you look good on college applications. You tour campuses, decide where you want to go, and once all of those decisions are made, you agonize over how you’re going to pay for it all.

If you are like the 40+ million other borrowers, chances are that you chose to use student loans as a means to finance your education. Yet in the middle of all of your research and decisions, you may have never taken the time to consider how those student loans are going to affect your credit scores after graduation. Don’t worry about it too much, because you’re certainly not alone.

How Student Loans Help Your Credit Score

The good news is that your student loans actually do have the ability to help you build positive credit — as long as they’re always paid on time. In fact, the most influential factor considered whenever your credit scores are calculated is the presence or lack of negative information. This holds true for both FICO and VantageScore credit scores.

Earning and maintaining good credit is going to be very important after graduation — whether you’re trying to rent or purchase a home, open a new utility account, purchase a vehicle, get a job, and many other circumstances. Keeping your student loans paid on time can be a great step towards earning the good credit you need to thrive financially in adulthood.

How Student Loans Can Hurt Your Credit Score

Unfortunately, if not handled properly, those same student loans have the ability to send your credit scores in the wrong direction. A late payment on a student loan can hurt your credit scores just like it would on any other account.

The catch, however, is that late payments on student loans may be an even bigger issue than you realize.

Most graduates don’t understand that they likely have multiple student loans appearing on their credit reports representing a separate loan for every disbursement of funds. It is not unusual for graduates to have six or more separate student loans on their credit reports. Although you may send in only one payment to your student loan servicer each month, that payment is distributed across a number of different accounts. As a result, if you fail to make the payment to your student loan servicer on time, you may actually have late payments reported on multiple accounts that appear on your credit reports.

It goes without saying that multiple late payments showing up on your credit reports at once could have a much more damaging impact than a single late payment on a single account. One account with a late payment is bad. Six accounts with late payments is a disaster.

To add insult to injury, the credit reporting of defaulted student loans are not regulated by the Fair Credit Reporting Act, which is the federal law that requires most of the negative information on your credit reports to be removed after seven to 10 years. Defaulted student loans are not required to be removed from credit reports, ever. This means that a negative, unpaid student loan can continue to haunt your credit reports and damage your credit scores indefinitely.

The Bottom Line

To the extent you never miss a payment on your student loans, chances are they’ll always be helpful to your credit scores. Student loans are installment loans, meaning you make the same payment for a fixed number of months, like a car loan or a mortgage. Installment loan debt is not problematic for your credit scores, as long as it’s paid on time.

So, don’t get bogged down by your burdensome balance when considering your credit scores. Focus on at least making the minimum payment due, every month.

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John Ulzheimer
John Ulzheimer
Contributing Writer

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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