3 Ways To Prevent Student Loans From Hurting Your Credit

Do student loans show on credit reports? Yes.

Does it affect scores? Yes, of course!

Student loans are considered a “good” type of credit. Having them on your report can be a great way in building a good credit score – as long as you pay on time and don’t default on them.  It is often one’s first encounter with financing. Therefore, you need to understand how student loans can impact your credit scores and your ability to borrow. Here are a few ways you can manage your student loan wisely in order to protect your future scores

Understand your credit score

First, you need to understand how your score is calculated. The three primary credit reporting bureaus - Equifax, Experian and TransUnion - use formulas that take into account five key factors:

  • Payment history 35% -- whether you pay all your bills on time

  • Amount owed/Credit Utilization 30% -- not only the total, but also your debt-to-credit ratio, which compares how much you owe with the amount of credit available to you

  • Length of credit 15% -- how long you have been using credit, including the average age of your accounts

  • Types of credit being used 10% -- your mix of different categories of credit, including revolving accounts (such as a credit card or a retail account) and installment loans (such as a car loan or a home mortgage)

  • New credit 10%-- the extent to which you recently have applied for new credit or taken on more debt

One factor of your credit scores comes from the length of your credit history. The longer you’ve had credit, the higher your score will be. Student loans can be around on your credit report for more than 10 years; thus, it can really give your credit score a boost. On the other hand, a missed payment which is worth 35% of your credit score can have a detrimental impact on your score!


1. Never Miss Your Student Loan Payments

Lenders want to be sure you’ll repay your loans on time each month. If one incurs a late payment, it is a possible sign of unreliability. Late payments WILL have a negative impact to your credit score. If a payment is more than 30 days late, it will begin to impact your credit score, knocking it down by 30 points or more.

If you are struggling to meet your finances, you can put your loans into deferment or forbearance. Putting your loan into deferment or forbearance will halt payments for a certain period of time. This doesn’t get you out of repaying the loan, but it will save you from late payment reports on your credit scores-  plus it doesn’t hurt your score. If you are struggling and can’t make your payments, call ahead of time and get a deferment or forbearance.


2. Do Not Default On Your Student Loans

Student loans have the highest delinquency rate of any consumer loan, higher even than car loans or credit cards, according to Bloomberg Businessweek. It occurs when a borrower continues to miss payments on a loan. For most federal student loans, you will be considered to have defaulted if you have not made a payment in more than 270 days.

Defaulting on a student loan can have a number of negative consequences. Your credit will suffer when you fail to make payment. For the first 30 days after payment is due, you’re probably in the clear. After that, missed payments will get reported to credit bureaus, resulting in lower credit scores. Lower scores make it hard to get loans in the future – and credit scores can impact other areas of your life as well.

Another negative consequence resulting from a defaulted loan is you– the one that defaulted the loan -  cannot qualify for federal aid if you wish to return to school. You would have to satisfactory pay the defaulted loan or pay out of pocket. This process that can take as long as a full year of on-time payments.


3. Manage Your Debt Ratio

Your debt level is the second largest factor in calculating your FICO Score. Student loans are installment loans. Installment loans are not as heavily weighted in your credit score as revolving credit is, such as credit cards. According to credit bureaus, properly managing your credit card balances is a strong indicator that you are disciplined enough to pay your debts. Proper debt management is great evidence that shows how you’re in control of how much money you borrow, within your credit limit.

Although student loans weigh less heavily than other type of debts, it still need to be paid off like any other debt. It is good to remember that a high debt-to-income ratio caused by a lot of student loans makes it harder for you to qualify for other types of loans until those student loans are paid off.

Student loans are good credit until you do something to make them bad credit.  In other words, the money you are borrowing is going to be used for educational expenses, as an investment in your future — not for extravagant, luxury items like Gucci belts and making it rain in the club and it’s also not for lace fronts and bundles. Use the money for necessities, pay the money back on time and you will not have to worry about the student loans affecting your score.