How do student loans affect my credit score?

Prepping for higher education may have you wondering how student loans may affect your credit score. The short answer is that student loans, much like any other type of loan, can impact your credit score depending on how you repay them. Knowing where your credit stands as you go through the student loan process can be helpful for staying on track and potentially even improving your credit score. Let's investigate how student loans work and ways you can manage them on the path to improving your credit.

How a student loan works

There are two kinds of student loans: federal and private. Federal loans are granted through the government, while private loans are through a lender such as a bank. After you apply and are approved for your student loan, the funds may be disbursed directly to you or the school and may come in one lump sum or several payments over the course of your schooling. The money may be used to pay for tuition and other related expenses, such as textbooks and room and board.

Repayment of the loan typically begins once you graduate from your program or are no longer enrolled, and you are expected to make your payments on the schedule you agreed to with your lender. These payments, like those on any other type of loan or line of credit, are part of your credit history and are recorded in your credit report, which is used to calculate your credit score. Here's more about the relationship between those three elements:

Credit history

Your credit history is your past credit behavior, including details of past payments, outstanding debts, how much revolving credit you have available, and how much of your total credit you use.

Credit report

Your credit report is the record of your credit history and includes your credit score. Each of the three major credit bureaus (Experian™, Equifax^® and TransUnion^®) compiles a credit report on you and may provide it to inquiring lenders when you apply for a loan or line of credit. Your credit report can help them determine your creditworthiness, as it lets them see how you've handled debt in the past.

Credit score

Your credit score is a three-digit numerical value. A credit score ranges from 300–850, can be categorized from poor to excellent, and is another indicator that helps determine your creditworthiness. Credit scores are calculated by two main scoring companies, VantageScore^® and FICO^®, and each weighs aspects of your credit report differently.

Do student loans affect your credit score while in school?

Your student loan may affect your credit score during the application process, depending on which type of loan you applied for. Private student loans have credit requirements and lenders typically perform hard credit checks on applicants. A hard credit check allows lenders to see someone's full credit report when they apply for a new line of credit. This type of inquiry appears on your credit report and may have a negative impact on your credit score. So, if you see your credit score slightly dip after applying for a private student loan, that could be why. On the other hand, federal student loans do not require an applicant to have a credit history. Therefore, the lender would not perform a hard credit check.

Outside of the application process, your student loans won't likely impact your credit score while you're in school. During this period, your student loan is typically registered as “in deferment," which means repayment is suspended. Student loan repayment typically doesn't begin until after graduation or once you are no longer enrolled. Because you aren't making payments on the loan during your schooling, there is no credit history related to the student loan to record during this timeframe.

However, it's possible to begin repayment sooner and work on building up your credit history while in school. You may have the option to make regular payments ahead of schedule, which could potentially help improve your credit score. These early payments could also help reduce the amount of overall interest you may pay on your student loans.

Does paying student loans help your credit score?

Yes, repaying student loans can help improve your credit score. Making full and timely payments, as agreed to with your lender, can help you keep a positive credit history, which can ultimately help improve your credit score over time. Helpful resources that can make the repayment process easier may include auto-payments, refinancing or signing up for a specialty loan repayment plan based on your chosen industry.

Can paying student loans harm your credit score?

Consistently making payments late, or missing payments altogether, can have a negative impact on your credit score. These habits can be indicators that your credit has become unmanageable, but there are steps that can help you take back control. For example, setting up a realistic budget and repayment schedule can work as a helpful first step.

Meanwhile, paying off your student loan entirely can also potentially impact your credit score. That's because paying off and closing the account changes a few factors that are used to calculate your score, such as how long you've had your open credit accounts and the types of different credit accounts you have open.

Help for managing and improving your credit score after college

Chase Credit Journey^® can assist your work toward a better credit score right out of school. From a free credit score to credit monitoring and alerts, these tools can aid in your efforts to improve your credit. Once you start with a free credit check, you may have a better idea where you stand. Credit monitoring from Chase Credit Journey^® can help keep you abreast of changes in your credit report and score with alerts. These often include information about what credit activity may have led to a change in your score, which could help you learn which habits to keep or change moving forward.

In summary

With an idea of how much student loans can affect credit score, you may find value in a tool like Credit Journey^®. Combined with your thoughtful and consistent credit behavior, Chase Credit Journey^® can serve you as a key asset in your efforts toward better credit.