If you are attending college or paying student loans after attending college, you aren't alone. Currently, 44 million Americans have substantial student loan debt. For scale, that’s about $1.5 trillion in student loan debt, give or take a few million dollars.
How does all of the student loan debt impact the credit scores for those 44 million Americans?
How are credit scores calculated?
In general, credit scores are calculated by three different credit bureaus based on a few specific factors. Credit scores consider several factors including your payment history, debt levels, age of credit, and debt diversity.
Can student loan payments help your credit?
Student loans affect the debt diversity of your credit score and the age of your credit, which is called the account mix. Student loans help you establish a credit history or credit age. If you haven't had any sort of credit before, it can be difficult to get approved for credit cards and other loans. Having a student loan on your credit history will help you build some kind credit.
Does having a student loan impact your credit directly?
Student loans, like car loans, are considered installment loans. You take out a large sum of money and pay it back over time in regular and fixed payments. These types of loans don’t positively impact anything but your account mix and your payment history. Since a student loan isn't revolving credit, it doesn't impact your debt usage. However, student loans help build credit if used correctly.
Does paying student loans build credit?
The account mix and payment history can be good for your credit in the long run. The payment history makes up 35 percent of your credit score. So, making regular monthly payments and avoiding penalties can bring up your score over time.
Although student loans can impact your credit, you don’t necessarily need good credit to take out a student loan in the first place. If you are taking out a student loan for the first time, you need to be able to make the loan payments on time every month. Many first-time college students don't consider the monthly student loan payments.
Can student loans hurt your credit score?
You aren't going to get any black marks for missing one payment, but falling behind on monthly payments repeatedly could hurt your credit score. Lenders usually report accounts that are at least 30 days past due. You should pay a missed payment right away to ensure that your score won’t be impacted negatively.
Most student loan payments don’t start when you take out the loan. For example, federal student loans don’t expect borrowers to start making payments until six months after they graduate. Student loan companies assume that graduates will be gainfully employed after six months. In contrast, private loans are more stringent. They usually expect payments to start within the first 30 days of the initial loan.
How does refinancing student loans impact your credit?
Student loans can be refinanced just like any other loan, but it’s important to shop around before you decide on a new lender or deal. Find the lowest rate possible before refinancing without having to ping your credit. Credit inquiries do impact your credit score, so the more you apply for refinancing, the harder it might end up being to get approved.
You should apply for all the loans you are comparing within a 14-day period. Multiple hard inquiries count as a single inquiry if they happen within 14 to 35 days. Getting everything figured out in a short period of time is beneficial so that you can start paying after you find the best rate.