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How Do Student Loans Affect Your Credit Score?

How Do Student Loans Affect Your Credit Score?

Today it is incredibly hard to graduate from college without any student loans, due to higher tuition rates and less student savings. CNN Money reports that students have an average of four student loans each with an average balance of around $29,000.

Graduation brings with it a new stage of life, but how will these loans affect your credit score and your ability to purchase things in the future?

Many lenders who extend student loans don’t look into a person’s ability to pay the loan back. “Student loans are the only credit vehicle where a lender continues to extend credit year after year without knowing the person’s ability, or even willingness, to pay,” said Michele Raneri, vice president of analytics at Experian.

Ultimately, how your student loans affect your credit score depends on your ability to make payments in a timely manner. However, there’s a little more to it than that – here’s the good and bad news about student loans and your credit.

Good News

Because your credit score is made up of different types of debt, a student loan can actually be beneficial to your credit score. This type of loan is usually treated as an installment loan by the credit bureaus, which is good news for you as it is weighted less heavily in your overall credit score.

Also, since you may not have a long record of credit use when beginning school, a student loan is a great way to start your credit history. And because these loans have an impact on your future and school isn’t considered a luxury purchase, it is fairly easy to obtain a student loan.

Bad News

A student loan can be a great way to pay for your education, but it can also turn into a disaster if you borrow more than you can afford to pay after graduation. Just like any other loan, if you fail to make your payments it will have a negative affect on your credit score.

Make sure you are able to afford your minimum payment amounts after you complete school. As long as you pay on time, your student loan won’t hurt your credit score.

On the other hand, if you’re hoping to pay your loan off early, you may be penalized.

Making extra payments on installment loans won’t improve your score. If you pay off the loan early, your credit score may actually drop if it was your only installment loan. However, early pay off could save you thousands of dollars in interest over the years, so it is usually the better choice if you can afford it. Weigh your two choices and see what feels best to you.

More Resources

If you need help understanding credit scores and credit repair, visit our blog for all that and more helpful topics.

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