Do Student Loans Affect Your Credit Score?

Student loans are a necessity for many students attending college. In some ways, these loans are just like any other. A borrower receives money from a lender and agrees to pay it back during a certain time frame with an agreed-upon rate of interest. In other ways, these loans can be very different. Subsidized loans allow the borrower to make no payments and accrue no interest while in school, for example. So,  do student loans affect your credit score? And HOW!

Your credit score is a number calculated using an algorithm from data that appears in your credit report. As such, any information that is not in your credit report has no effect on your credit score. 

Most lenders report your loans to the credit bureaus, so do student loans affect credit score? Yes. Part of your credit score is based upon how much total credit you have available, and how much total debt you have. Each new student loan increases the amount you owe. Owing a higher amount may not have a large impact on your credit score, but lenders will consider if your overall debt is too high for your income and financial situation.

If your loans are in deferment, this status will be reported. Your credit score does not take payments on deferred loans into account. Some scores exclude deferred loans from the calculation altogether.

The most important part of your credit score is determined by your payment history. Lenders report your student loan payments to the credit bureaus. Each on-time payment improves your score. Each late payment hurts your score. Often, student loans are issued and accounted for as individual loans. Even if the loans are grouped together by the lender and there is a single payment, the loan may still be reported individually on your credit report. For example, two years’ worth of student loans may actually be reported as eight-semester loans. This means making one late payment may actually be calculated as eight missed payments when it comes to student loans on your credit report.

If you default on government-issued student loans, they will be reported as a Government Claim. Government claims are considered derogatory remarks. Derogatory remarks result in substantial deductions from your credit score. Defaulting on private student loans will result in the loan being sent to collections, so student loans on your credit report will be a derogatory mark.

Paying your student loans on time is a great way to build credit and improve your score, but if you’ve gotten behind them, contact Key Credit Repair today for your Free Credit Repair Consultation.