Figuring out your finances can be like trying to play a board game without the cards that explain the rules. You know the basics, but you keep running into things you don’t understand. Maybe you find the card, or figure it out, and then move on. But you keep running into new things you don’t have cards for. Student loans can feel like a card that went missing. There’s no joking around about $30,000 in loans, but how they affect your life isn’t always clear. Your biggest question probably is: do student loans affect credit score.
Credit score is a complicated enough subject on its own. But you do know that you need a good one, and that a bad one can hurt your future chances at a loan or mortgage. That means more difficulty in your future. You probably plan on buying a house. Maybe you plan on going back to school. A low credit score can make both of these things harder.
So whether you’re thinking of taking out loans for school or planning out how you’re going to pay them off, understand their weight. Do student loans affect credit score? We’ll break it down.
Do student loans affect credit score?
So, do student loans affect credit score. Well, yes, like many other things, they do. But FICO, the organization behind the most widely used credit scores, weights them differently than your credit card debt, if you have any. That’s because student loans, unlike credit card debt, are installment loans. It sounds fancy, but it just means that you pay off the total over the course of years making payments each month.
FICO places more importance on revolving credit, which includes your credit card debt. So even if you have $50,000 in student loans, it’s not as serious as having (we can’t even think about it) the same amount in credit card debt. In fact, FICO readily points out that roughly 7% of consumers with $50,000 or more of student loan debt have excellent credit scores. (Psst: That means scores of over 800 if you’re not familiar with the lingo.) In the next bracket down (scores 750-799), you’ll find roughly 14% of consumers with student loans for over $50,000.
No, it doesn’t matter whether your student loans are public or private. It’s all the same to FICO. But still, since they count, what should you focus on?
But your total student loan amount can affect some things
While FICO won’t drop your score because you have a large student loan total, it inadvertently affects other things. Your total amount on your student loans impacts your monthly payments. The higher the amount in loans, the higher the monthly payment in general.
When you apply for other loans, such as a mortgage, this is where your student loan total can catch up to you. Brokers will look at your debt-to-income ratio. That means comparing how much you pay monthly toward your loans to how much money you bring in each month.
If your loan payments take up too much of your monthly income, you might not be approved for a mortgage. It makes sense. You have other monthly costs, too, like rent and food. They’re worried you might not be able to take on an additional monthly payment.
How student loans affect your credit score
So it’s not really the student loans themselves, or the total amount, that matters. Rather, it’s your monthly payments. FICO will track whether or not you make the monthly payments on time and pay the full amount. This is where setting up autopay can save you from stressing.
Unfortunately, the higher your current credit score, the more it can fall if you miss even one payment. An example of this was outlined by myFICO in which someone boasting a 780 credit score lost 100 points, while another with a credit score of 680 can lose just 60 or 70.
The dirt on student loans and your credit score
Make your focus hitting all those monthly payments on time and in the full amount due. Stop stressing about the larger amount, at least when it comes to your credit score. If you’re looking for an app to help you save more money toward your payment, try Simple. No, I’m not a rep, I just use it myself to save more money. You can create multiple goals. They can last a week or even multiple years. Each month you can set up a goal for your student loan payment and set up automatic transfer so you make your due date without a second thought.