If you’re concerned about the impact student loans will have on your financial future, you’re far from alone. And while your primary focus may be on creating a plan to pay off those loans efficiently, it’s important to know that your student loans can influence other areas of your financial life as well, like your credit health. Student loans are a type of installment loan, which work similarly to auto loans and mortgages. While student loans are very different from credit cards, they can play an important role in helping you build credit history and will impact your credit score in various ways.
The most important thing you can do to maintain healthy credit is make sure you’re paying your bills on time — student loans are no exception. Even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years. Staying on top of your student loan payback schedules is essential, especially since you may need to pay your loans to different servicers. The National Student Loan Data System is a great resource to help keep track of your federal student loans’ statuses and servicer information. Payment history may be the most important factor, but there are other ways your student loans can have an effect on your credit score.
When you apply for credit, the lender will pull your credit report to help make a lending decision. This is sometimes called a hard pull. A hard pull or hard inquiry can lower your credit score. By how much depends on the credit model and your experience with credit.
Most federal student loans do not require a hard inquiry on your credit. Currently, Direct PLUS loans are the only federal student loan option that will do a hard pull. This type of loan is only available to graduate and professional students, and parents of undergraduate students. On the other hand, private student loans do require a hard credit inquiry and can impact your credit score. To minimize the impact of multiple hard inquiries, it’s smart to shop around for your student loan in a short time—ideally within two weeks.
The average age of your accounts is one factor in how your credit score is calculated. An older average age of credit accounts is better. After you receive a student loan, it will be reported by the lender to the credit reporting agencies and be added to your credit report. This will help you build your credit history. And since you’re likely to pay off student loans over a long period, they can help you begin establishing credit while also helping you maintain a higher average credit age until they’re paid off and the accounts are closed.
In general, having a variety of account types, like different installment loans and credit cards, can have a positive effect on your credit score. Some young adults may only have a credit card or be an authorized user on someone else’s credit card account, prior to getting a student loan. Student loans add to your credit mix, which can help your score over time. However, when the student loan account is closed, your credit mix may become less diverse, which could lower your score. But don’t let that concern you too much, as paying off student loan debt as efficiently as possible is a smart move for your financial health.
In many cases, if you have a thin credit file, student loans can help you build a credit history. It’s difficult to be precise in how your particular credit score will fluctuate with student loans because there are different scoring models and they may weigh categories differently. We know you have a lot to think about when pursuing your education, but be sure to make time to monitor your student loans. Just like more time spent in class can help raise your grades, more time working with your finances can help improve your credit health and understanding.