How Student Loan Debt Impacts Your Credit Report

With many students graduating college with significant college loans, it’s important they understand how this debt shapes their credit score and purchasing power in the future.

While having a significant amount of student loan debt may limit grads’ discretionary spending and force them to live on a tight budget as they work to pay it off, it doesn’t necessarily mean their credit history will suffer.

According to MyFico.com, 39% of individuals with more than $50,000 in student loan debt have a FICO score above 700 and more than 7% of individuals with student loans have credit scores higher than 800. Most experts consider a credit score of above 700 to be solid.

“You are not doomed to a horrible financial future simply because you have a high amount of student loans,” says MyFico.com advisor and CEO of MoneyZen Wealth Management, Manisha Thakor. “What you have to do is manage them responsibly.”

Here’s how student loans can affect credit history and expert tips on how students can keep their score in check.

Pay on Time, Every Month

Paying bills on time is big component of a good credit score, says author and credit card expert, Beverly Harzog, and introducing monthly loan payments into a grad’s budget is a great opportunity to show history of timely payments.

“Student loans are installment loans and it helps boost your credit score if you have different types of credit--if you also have a credit card, then this adds an installment loan to your credit profile,” she says. “When your credit score is calculated, it's considered a positive if you can handle different types of credit.”

Whether grads choose to set up automatic bill pay or another method to stay on top of payments, keep in mind that credit scores are used to indicate how likely a borrower is to default—the higher the score, the lower the risk, says Jon Chapman, co-founder and Chief Strategy Officer at EverFi.

“Once you start missing payments, even just a few, it raises a red flag about your creditworthiness and can lower your score.”

Having a low credit score impacts grads’ ability to make big purchases like a car or home.

Credit Card Debt is Your Biggest Threat

Maintaining control on any existing or future credit card debt is essential for keeping credit history on the upswing.

Despite the fact that students are taking on hefty amounts for education expenses, credit card debt has a larger influence on a person’s FICO score than student loan debt because it’s a stronger indicator of a person’s credit risk, according to Thakor.

While it’s important to build positive credit, grads will likely have student loan debt for years and any additional credit card debt needs to be limited if not nonexistent, says Harzog.

“Keep in mind that student debt isn't discharged in a bankruptcy,” she says. “This can affect your finances and your credit score in a very negative way--make decisions today that will help you meet your loan obligations later.”

Work With Lenders if You Can’t Make Payments

If grads realize they are having trouble paying student loan debt, it’s important to contact lenders to discuss options such as forbearance, deferment, or income-based repayments.

“If you have not been employed for three months and your loans are in forbearance, banks and lenders are going to look at specifically why and a lot of them understand, but that’s something that borrowers need to highlight,” says Orlando Espinosa, president of marketing and outreach of ScholarshipProz. “Banks look for consistency, [payment history], and the income that the borrower actually has.”

Harzog explains if an account is listed as deferred, it can lower a grad’s score and impact a lender's decision to extend additional credit lines.

“If you are planning to apply for credit in the future, wait until you start making payments on your student loan to show that your credit history shows regular payments,” she says. “This will go a long way toward making you look better to a lender.”

Check Credit Report Regularly

College students and grads should pull their credit report from all three credit scoring bureaus at least once a year to ensure that their loans and payments are being reported correctly.

“Make use of annualcreditreport.com and just get in the habit of checking your credit report regularly so that your credit score can accurately reflect the hard work that you’re doing,” says Thakor.

Be aware that the individual credit reports won't always be exactly the same because some lenders don't report to all three bureaus and loans are not always reported the same, says Harzog.

“Many students borrow what they need as they go through college as opposed to getting one giant lump sum at the start of college,” she says. “In many cases, each time you borrow more money, it's a different line item on your credit report, so it can look like you've got a lot of debt when a lender looks at your report.”

Grads should review their reports to check for any discrepancies such as a fraudulent charges or inaccurate accounts, says Espinosa.

“If you find something that you didn’t purchase or something that you’re not in agreement with, you would contact one or all three [credit bureaus] so that they can remove that information that’s not yours.”