Borrowing

3 ways your student loan debt can affect your credit

Twenty/20

Your student loan debt doesn't just play a role in what your monthly budget looks like and how easily you can meet your financial goals. It can also significantly affect your credit.

Depending on the kind of loans you and your family take out for college, your credit score may or may not matter at the time you borrow. But after that, federal and private student loans in your name can have both positive and negative effects on your credit score. Here's how.

Student loans can help you build credit

"Student loans are considered an installment loan on someone's credit," says Meagan Landress, a certified student loan planner at Financial Coach Meagan.

Installment debts, which also include mortgages and car loans, are those debts borrowed in one lump sum and paid off in regular installments. On your credit report, student loan debt will show up as a specific amount borrowed that comes with a specific set of terms within a set time frame, known as your repayment period.

Making at least the minimum payment will ensure that you are satisfying the key component of building and maintaining good credit. By making consistent payments, you'll look like a reliable borrower, says Landress.

Student loans can limit your future borrowing

As you begin to plan for future financial milestones, you might be thinking about how your student loan debt will play into major purchases like your first home.

A good repayment history makes you look like a reliable borrower. But lenders also look at something called your debt-to-income ratio when deciding whether to lend you money, and how much, says Lauryn Williams, a certified financial planner at Worth Winning in Dallas.

"Mortgage lenders are not looking at your total student loan debt, but instead at what your monthly payment toward your debt is in relation to your other bills," she explains.

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Lenders like to see that those monthly debt payments represent no more than 36% of your monthly income. If you have a lot of student loan debt and other debts relative to how much you make, they may not offer you a mortgage, or you may only qualify for a smaller loan.

If you're hoping to buy in the near future, consider tacking on an extra $25 or $50 to your minimum payment every month so that you can pay off your debt faster and lower your debt-to-income ratio.

Making payments on time can help your score

"One of the biggest factors that goes into how student loans impact credit is on-time payments," says Landress.

Making on-time payments each month for the duration of your repayment plan will not only look good on your credit report, she says, but it will also increase the length of your credit history, which is a crucial deciding factor for most lenders should you decide to borrow in the future.

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But falling behind on your monthly payments can hurt your credit score. If you miss or are late on multiple payments, or let your loans go into default, your credit score is likely to drop.

Landress says that late payments happen, and most student loan servicers will allow some kind of grace period. But you may incur late fees as a result, so try to be punctual.

An easy solution: Opt for auto-pay, which lets lenders automatically pull payments from your checking account each month. That ensures you'll never miss a payment, and you might even get a discount on your rate for signing up.

"People find themselves in trouble when they miss payments, or they're late on payments constantly," says Landress. "To me, I feel like it's a really quick and easy fix: Just set it up automatically so that you never miss a bill."

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