How Student Loans Affect Your Credit Score: The Good and the Bad

Student loans impact your financial life in many ways, and they can help or hurt your credit score. Just one missed payment can lower your score and leave a negative mark on your credit report for as long as seven years. According to the Consumer Financial Protection Bureau, about one in three borrowers have missed payments. Fortunately, making timely payments has the opposite effect.

Current private student loan refinance rates

Here's how student loans can affect your credit, along with steps you can take to build a healthy credit score.

Do student loans affect your credit score?

Student loans can help or hurt your credit score, depending on how you manage them. Since they're installment loans, they impact your overall credit mix, which accounts for 10% of your FICO score. Having a variety of types of debt can improve your score.

However, student loan payments are included in your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income that goes toward debt payments. High student debt can increase your DTI ratio, which can affect your ability to get a mortgage or take out other loans.

On-time payments help your credit score

One of the biggest ways student loans impact your credit score is through your payment history. Your payment history accounts for 35% of your FICO score, so it's the biggest factor in determining your credit score.

That means there's an opportunity to improve your credit score through consistent, on-time student loan payments. Establishing a history of on-time payments shows lenders you're reliable and can help you qualify for better rates and terms on future loans. As you continue to pay off student loans, you'll lower your overall debt, boosting your credit score.

Missed or late payments hurt your credit score

Missed or late student loan payments can hurt your credit score in several ways. A late payment will typically show up on your credit report once it's 30 days past due for private student loans and 90 days for federal student loans. Just one late payment can cause your credit score to drop by 100 points or more, so the impact is significant.

Late payments usually stay on your credit report for up to seven years, though the impact will lessen as time goes by.

If you are 270 days past due on your federal student loan payments or 120 days past due on private student loans, your loan is considered in default. Defaulting on your loans not only hurts your credit score but can also lead to wage garnishment and having your tax refunds withheld. It can take years to rebuild your credit after defaulting on a loan.

Does refinancing student loans help my credit?

Many borrowers will refinance their student loans to secure a lower interest rate and possibly lower their monthly payments. However, refinancing will have a short-term and long-term impact on your credit score.

“A refinance may initially lower credit scores,” says William Bevins, a certified financial planner (CFP) and private wealth manager. “However, in the long term, consolidating debt and securing lower interest rates can provide significant benefits. I believe it's best to maintain a long-term perspective when addressing debt,” Bevins adds.

When you refinance student loans, your lender will do a hard inquiry on your credit report, which can cause your score to drop by one to five points. The long-term benefits of refinancing tend to outweigh the minimal hit to your credit score.

“The ultimate goal of the refinance is to secure a new loan with a better interest rate and overall terms, making the debt more manageable with lower payments and a healthier debt-to-income ratio,” explains Ohan Kayikchyan, a certified financial planner (CFP). He adds that consolidating multiple loans can simplify payments and reduce the risk of missing a payment.

How paying off student loans early affects credit

Paying off your student loans in full will benefit you in the long run, but it can initially hurt your credit score. If your student loans were your only installment, paying them off early can lower your credit mix. Once the closed account is removed from your credit report, it can reduce your average account age, which makes up 15% of your credit score.

“However, this minor dip does not outweigh the long-term benefits of reducing debt and improving cash flow,” says Bevins.

Kayikchyan agrees, adding, “Despite these short-term effects, becoming debt-free is a substantial financial move that will improve your financial stability in the long run, giving you a sense of reassurance and confidence in your financial future.”

Tips to improve your credit score

Effectively managing your student loans is the best way to improve your credit score and achieve long-term financial stability. Here are some strategies you can implement:

• Set up autopay: When you sign up for autopay, your student loan payments will be automatically taken out of your bank account each month, so you never miss a payment. In many cases, your loan servicer will also reduce your interest rate by 0.25 percentage points for signing up for autopay.
• Keep old loans on your credit report: Once you pay off a loan, don't request to have it removed from your credit report immediately, since this can negatively impact your credit score. Paid off loans can remain on your credit report for up to 10 years, which will positively impact your credit score.
• Consider refinancing: Refinancing your student loans can lower your interest rate and help you pay off your debt faster, which will benefit your credit score in the long run. However, be careful about refinancing federal student loans because you'll lose out on federal benefits like income-driven repayment and potential loan forgiveness.