Will Student Loans Help or Hurt Your Credit?

There is no simple answer to the question “Will a student loan help or hurt my credit scores?” The answer is going to vary from person to person and from credit report to credit report. The answer is going to be influenced by a lot of other factors as well, most importantly of which is how you manage your accounts. The answer to the question above is the ever frustrating, “It depends.”

How a Student Loan Can Help Your Credit Scores

Positive, on-time, and otherwise well-managed student loan accounts certainly have the potential to impact your credit scores in a positive way. The actual balances on your student loans are going to have minimal negative impact on your credit scores (unlike credit card accounts where the mere action of having a balance show up on your credit reports might lead to credit score problems). Furthermore, student loans may help you to add to your mix of credit – a factor which FICO and VantageScore credit scoring models consider in the calculation of your credit scores. Student loan accounts also have the potential to eventually help to improve the average age of your credit as the loans age.

How a Student Loan Can Hurt Your Credit Scores

Unfortunately, student loans also have the potential to hurt your credit scores and to potentially do so as severely as other types of accounts.

As is the case with any other type of account appearing on your credit reports, the way you manage your student loans is ultimately going to be the factor which determines how those accounts will impact your credit scores. If you routinely make late payments, become past due on your accounts or, worse, allow the accounts to go into default then the impact which your student loans will have upon your credit scores is going to be negative.

However, student loans are different than a lot of other types of accounts in the sense that most borrowers do not understand that there are likely to be multiple student loan accounts appearing on their credit reports. Student loans will generally be reported to the credit bureaus on a disbursement by disbursement basis, even if you’re only making one monthly payment. This means if you took out a new student loan every semester for 4 years of undergraduate study then you will probably have 8 separate student loan accounts showing up on your credit reports. You might make a single monthly payment to your student loan servicer, but each individual account will be reported to the credit bureaus separately.

Because there are likely multiple student loan accounts on your credit reports, late payments can become a pretty big deal. You might believe that you made a late payment on only a single bill (the monthly payment which you make to your student loan servicer), but you could have 8 separate accounts each reporting as late when you failed to make that monthly payment as scheduled. The negative credit score impact of late payments or any other derogatory activity on your student loan accounts could potentially be magnified as a result.

Is Consolidation Helpful?

In order to safe guard your credit reports against the potential for multiple late payments you may want to consider the possibility of consolidating multiple student loans into a new, single loan. In addition to this defensive protection against the potential for multiple late payments, a consolidation loan may also to help you by reducing the number of accounts with balances on your credit reports – a factor which FICO and VantageScore consider when calculating your credit scores.