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Do Student Loans Affect Your Credit Score?

Janine DeVault

Aug 13, 2021 8 min read

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    Just like any other loan, student loans can impact your credit score for better or worse. Making on-time payments will help you develop a good credit history while defaulting on your payments can harm your credit score. 

    Your credit score is determined based on five key factors:

    • Payment history

    • Credit utilization

    • Credit history

    • Credit mix

    • Credit inquiries

    For those with a limited credit history, student loans can be a powerful way to build positive credit and payment history, as long as you make your payments on time. Student loans also add to your credit mix, signaling to lenders that you can balance multiple types of credit at once. 

    Below, we’ll dig into the nitty gritty of exactly how student loans can affect your credit and why it’s crucial to pay your loan on time each month. We’ll also discuss what you can do if you’re struggling to make payments, and the different types of student loans you can apply for, including options for those with bad credit. With these tips in mind, you’ll have all the information you need to leverage your student loans to boost your creditworthiness. 

    Let’s jump in.   

    Ways student loans affect your credit

    While student loans can do a lot to help you build credit, it’s important to understand the impact on your credit profile if you ever fail to pay your student loan. There are three main situations that could have a negative impact on your credit score:

    1. Paying late or skipping a student loan payment

    2. Defaulting on your student loan

    3. Getting your student loan sent to to collections

    Skipping student loan payments

    Sporadically missing a payment or making a late payment isn’t likely to be severely damaging to your credit score, but it could lead to a minor dip. If late or missed payments become more frequent, you could face fees from your lender and lose significant points on your credit score.  

    Once you fall behind and begin accruing fees, it can be difficult to catch up on your payments, which only serves to worsen the situation. 

    Defaulting on your student loan

    If you stop paying your student loan for a prolonged period, you risk your account going into default. In Canada, the National Student Loan Service Center considers accounts to be in default after 270 days (nine months) of non-payment. At this point, your account will be charged off and sent to collections.

    Student loan sent to collections

    Your payment history makes up 35% of your credit score, so having a delinquent account on your credit report is very damaging. Late payments, charge-offs, and collections will remain on your report for up to six years, even if you pay off the balance before then. A derogatory mark like this could make it challenging to qualify for future credit products such as credit cards, a car loan, or a mortgage. 

    Remember, even if your student loan account is charged off, you’re still responsible for paying the outstanding balance. Collection agencies will pursue you for the amount you owe and could even take you to court or garnish your wages. 

    So, even though your delinquent account will remain on your credit report after being paid off, it’s still worth making an effort to resolve the debt. Doing so will help lessen the severity of the delinquency on your overall credit score and create a record of debt resolution. 

    The significance of monthly payments

    Making your monthly payments on time is one of the simplest and most effective ways to build your credit, especially if you have a limited credit history. 

    Again, payment history accounts for 35% of your credit score. The longer you go without missing a student loan payment, the stronger your score will be. A history of on-time payments will make it easier to qualify for future credit products and lead to lower interest rates over time.  

    Consider setting up automatic payments on some of your bills to ensure you never miss a single bill payment. 

    How might student loans help you boost your credit score?

    Since you may qualify for a student loan long before you qualify for a credit card, student loans may be the first form of credit you ever apply for. There are three main ways that a student loan can help you boost your credit score. Student loans help you:

    1. Build a positive payment history

    2. Establish credit history

    3. Contribute to your credit mix

    Build a positive payment history

    Your payment history is the largest factor that impacts your credit score. The longer you go without missing payments, the stronger your score will be. A history of successfully paying your student loan will help you get approved for other forms of credit down the road. You can capitalize on the power of on-time payments to build your credit score and increase your overall creditworthiness. 

    Establish credit history

    Your credit history makes up 15% of your credit score. Your credit history includes how long your accounts have been open, how long it’s been since you’ve used them, and whether they’re still active. To calculate your credit score, credit bureaus need one of your accounts to be at least six months old. A student loan is included in your credit report and helps you establish credit history with Canada’s main credit bureaus. As you keep your student loan account in good standing with on-time payments, this will help you boost your credit score over time.

    Contribute to your credit mix

    Additionally, student loans help diversify your credit mix, demonstrating to lenders that you’re capable of successfully managing different types of accounts. 

    Someone with various types of loans, such as a student loan, a credit card, and car payment, is typically viewed more favourably than someone with, say, three credit cards. 

    You may have heard people refer to student loans as “good debt,” and this is why: they add diversity to your credit portfolio. The reality is, though, that any line of credit can be good as long as you pay it back on time. 

    Your credit mix makes up just 10% of your credit score, but every little bit counts! 

    Does refinancing your student loans hurt your credit?

    Refinancing your student loan could help you reduce your monthly payments, lower your interest rate, or adjust the terms of your loan to be more favourable. 

    Applying for refinancing will require a hard credit check, which can temporarily lower your credit score. Applying for a series of refinancing loans within a short period could result in a more significant ding to your score than if you strategically apply for one or two refinancing loans. As long as you continue to pay all of your open credit accounts on time and don’t continually apply for new lines of credit, your score will likely recover from hard credit checks within a few months.

    While applying for refinancing could lower your score in the short term, refinancing your student loan could ultimately benefit your credit score. 

    If you’re struggling to keep up with your student loan payments, refinancing could enable you to lower your monthly payments and leave you more wiggle room in your budget. However, to qualify for refinancing, you’ll need to have a decent credit score.

    If you’ve already missed a few payments and have derogatory marks on your credit report, you may not be able to refinance your student loans at a competitive interest rate. Refinancing at a higher interest rate may still enable you to lower your monthly payments, but if you spread them over a longer term it could cost you more money in the long run. 

    Even though spending more money isn’t ideal, it may be worth doing to ensure you can keep up with payments. After all, missing payments can damage your credit, lead to late fees and additional financial strain. It can also make it harder to qualify for new loans down the road. It’s wise to try to protect your credit score whenever possible. 

    You should be aware, though, that if you’re struggling to make payments on federal student loans in Canada, you may be able to negotiate better terms through your loan provider. Before you refinance, research your options for student loan relief or forgiveness through your current provider. They may be able to adjust your payments based on your income or even pause your payments for a set period. 

    When you refinance your student loans, you will no longer be eligible for these programs as your debt will be privately held.  

    How new student loans are influenced by credit scores

    Generally speaking, there are two types of student loans you may choose from: federal loans and private loans. 

    Federal student loans

    Federal student loans are offered by the government, while financial institutions offer private student loans. The two types of loans each have slightly different application requirements.

    Federal student loans don’t typically require a credit check, making them a promising option for those with poor credit or no credit history at all. These loans have a fixed interest rate, so having an excellent credit score won’t help you secure a lower rate. 

    Federal student loans are often approved based on your income (or your parents’ income), meaning those who show a history of high earnings may not qualify. 

    Private student loans

    Private student loans are generally approved based on your credit score. If you have bad credit or limited credit history, you may need a co-signer to help secure a private student loan. As with most other credit products, applicants with higher credit scores tend to qualify for lower interest rates and more favourable loan terms overall. 

    If you have a limited credit history, bringing a co-signer onto your student loan application could help you secure better interest rates, saving you money over time. Just remember, if you then default on your student loan payments, your co-signer’s credit score will be affected too.  

    The Bottom Line

    Any time you obtain a loan, your credit score will be affected. Student loans are no exception. Even if your student loan application doesn’t require a credit check, having a loan approved will show on your credit report.

    For some, a student loan may be the first line of credit you ever receive, and it can be a powerful way to begin building a positive credit history.

    Those with bad credit or limited credit can rest easy knowing that there are ways to get approved for student loans, even if your credit score leaves something to be desired.

    Paying your student loan on time each month can help you build (or rebuild) a solid history of on-time payments while adding to your credit mix.

    Janine DeVault
    Janine DeVault

    Janine is a writer who focuses on topics such as credit education, money management, and renting best practices for tenants and landlords. Janine loves to travel and has lived in Canada, the US, and Mexico.

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