Student loans can have a big impact on your finances. If you have student loan debt, you know just how much student debt can impact your financial outlook. But does paying your student loans build credit? The short answer: yes.
Let’s take a closer look at how your student loan payments impact your credit score.
How does paying student loans help build credit?
Responsible management of your student loan payments will help you build credit. Paying your student loans should help you build your credit score over time. However, you might end up hurting your credit score if you don’t make regular, on-time payments toward your student loans.
Student loan payments are reported to credit bureaus
Credit bureaus are the organizations that collect and store financial information about you. The three major credit bureaus are Experian, Equifax, and TransUnion.
Lenders can report your loan activity to these credit bureaus. In turn, this collected data is stored as a credit report and can be used to determine your credit score.
Whether you have federal student loans or private student loans, the actions you take regarding your loans will likely be reported to the credit bureaus. As with all financial choices, your actions can have either positive or negative consequences.
Here’s the breakdown.
Let’s say you make regular, on-time monthly payments to your student loans. Since the FICO score takes your payment activity into account, your credit score should be positively impacted by your actions.
On the flip side, let’s say you are unable to make regular, on-time payments to your student loans. In that case, your credit score may be negatively impacted.
If you are struggling to keep up with your monthly payments after graduation, then you may want to consider alternative repayment plans available with federal loans.
What factors impact your credit score?
To help you better understand how paying your student loans helps you build credit, it’s important to have a basic understanding of the factors that influence your FICO score.
Here’s a quick breakdown of factors that impact your FICO score:
- Payment history. Payment history accounts for the largest component (35%) of your credit score. A late or missed payment can adversely affect your credit.
- Amount owed. The amount of debt you owe is another critical factor (30%) which determines your credit score. FICO also looks at your credit utilization ratio which divides the total amount of revolving credit you’re using by your total credit limits.
- Length of credit history. The length of your credit history makes up 15% of your FICO score. In general, a long and responsible credit history will lead to a higher credit score.
- Credit mix. Having a good credit mix accounts for 10% of your score. Different types of credit include installment accounts, like student loans and mortgages, as well as revolving credit accounts, like credit cards. A more diverse credit mix is preferred and can positively impact your credit score.
- New credit. New credit inquiries and any new credit accounts will impact 10% of your credit score calculation. Generally, more hard inquiries will temporarily lower your credit score. If you’re considering student loan refinancing, be careful of authorizing a hard credit inquiry with too many lenders in a short period. Instead, explore offers through soft credit checks until you’re ready to move forward with a particular lender.
Are your student loans having a positive impact on your credit score?
A good credit score can open the door to many financial possibilities. Whether you want to buy your first house or open new credit lines, a good credit score can help you tap into more affordable financing opportunities.
So, how can you ensure that your student loans are having a positive impact on your credit history? Here’s a checklist of questions to work through.
- Can you afford your monthly student loan payment? If you can’t afford your monthly payment, consider seeking out a different repayment plan or refinancing your student loans.
- Are you making on-time payments every month? A history of on-time student loan payments will positively impact your credit score.
- Are your loans close to default? A defaulted student loan can wreak havoc on your credit score. Reach out to your lender about your repayment or financial hardship options.
Take an honest look at your student loan repayment habits. Do your best to maintain a responsible repayment pattern. As you create a history of on-time student loan payments, your credit score may rise over time. But without responsible management of your student loans, your credit score is likely to suffer.
Student loans can have a positive impact on your credit score. However, the way you manage your student loans can cause your credit score to rise or fall. If possible, make on-time monthly payments consistently to watch your credit score strengthen.