FAQ: Does Paying Student Loans Build Credit?

When you decide to go to a university, community college or career school, you might need to consider taking out a student loan. While taking out a loan may seem a bit risky before you have a career in place, a student loan is often a good investment in your future. 

The main payoff for taking out a student loan is getting the education you need to secure a well-paying, stable career or job. But you may be wondering, “Does paying student loans build credit?"

Learn more below about how making student loan payments can impact your credit score, and a few ways student loans affect your overall financial wellbeing. 

Does paying student loans build credit? 

The short answer to the above question is: yes. 

Once you begin paying off your student loans, the loan provider or servicer will report your payments to the three main credit bureaus — Equifax, Experian and TransUnion. These on-time payment reports will directly impact your payment history, which accounts for 35% of the FICO scoring model. 

At 35% of your score, this is the highest-weighing FICO Score variable, which means these on-time payments can have a significant impact. This applies to federal student loans and private student loans taken out in your name. Student loans taken out for you in a parent’s name will not affect your credit score.  

When will payments start impacting your credit score?

When your student loan payments begin positively impacting your credit score will depend on when you begin repayment. Some private student loans may require you to make payments while you’re still in school, so you’ll start improving your payment history shortly after taking them out. 

However, federal student loans are typically deferred until you graduate or leave school. If you take advantage of this deferment, the positive impact will also be deferred.

How else can student loans help you build credit?

Making your payments isn’t the only way student loans can help your credit score. Because federal loans don’t require a credit check, you can obtain one with no credit card at all. This will help you establish the credit you need without resorting to a secured credit card or credit-builder loan. 

Also, if you’re a borrower with only revolving accounts — credit cards and lines of credit — on your credit report, getting a student loan may improve your credit score. That’s because a student loan is an installment loan and can help balance your credit mix with a different type of credit. This accounts for only 10% of your FICO Score, but it can help. 

Can student loans hurt your credit score too? 

While student loans are a great way to build credit, they can also negatively impact your credit in some ways. Here are a few ways you can negatively impact your FICO Score with a student loan. 

Credit inquiry

If you take out a private student loan, the lender will likely perform a hard inquiry on your credit to see if you have good-enough credit to qualify. A hard credit inquiry impacts the new credit variable of your FICO Score, which accounts for 10% of your overall credit score. 

While this is small, it can lower your score by a few points. However, it only impacts your credit score for 12 months. 

Federal student loans don’t require a credit check, so they will not negatively impact this factor. 

New account

When you take out a student loan, you will be adding a new account to your credit report. While this can help your credit mix, as mentioned earlier, it can also negatively impact two FICO variables: new credit and length of credit history. 

The new credit variable factors in any newly opened accounts, and adding a new student loan will impact it negatively. This can result in a small credit score decrease.

The length of credit history variable, which accounts for 15% of your credit score, looks at the average age of your debts. The older they are on average, the better the impact is on your credit score. Adding a new student loan account will lower this average age, potentially lowering your credit score. 

Amounts owed

Once you take out a student loan, your loan balance will increase the total amount of debt you owe, which may negatively impact your amounts owed variable. This accounts for 30% of your credit score, so the impact may be significant. 

However, as you pay down the loan, this amount reduces and your credit score can recover. 

Missed and late payments

As with any debt, missing payments or late payments can significantly hurt your payment history, quickly sending your credit score tumbling. With private loans, lenders can report your late payment once it reaches 30 days past your due date. 

Federal student loans give you a little more leeway with late payments. The loan servicer will not report late payments until they are 90 days past the due date. 

In both types of loans, if you enter severe delinquency or default on your student loans, they may be placed in collections, and you may potentially be sued for the unpaid balance through wage garnishment. 

What other ways can student loans impact your creditworthiness?

While the impacts to your credit score are clear, there are other ways a student loan debt can impact your ability to secure credit. 

Student loans can impact your ability to secure other credit by increasing your debt-to-income ratio (DTI ratio). Your DTI ratio is your monthly minimum debt payments divided by your monthly pretax income. Once you take out a student loan, its minimum monthly payment will be a factor, increasing your DTI ratio.

For example, if you had $1,000 in monthly debt payments and a monthly income of $5,000, your DTI would be 20% ($1,000 / $5,000 = 0.20). 

However, if you took out student loans with repayment plans that added up to $500-per-month in minimum payments, your DTI would be 30% ($1,500 / $5,000 = 0.30).

If your DTI ratio exceeds a lender’s limits, they may reject your application for credit, even if you have a good credit score.

Use student loans to build your credit

Taking out student loans not only puts you on the path toward higher education, but it can help you build credit with on-time payments. And for those with no credit, federal student loans are a quick and easy pathway to building the credit you’ll need to get credit cards, a mortgage, a personal loan or a car loan in the future. 

Keep in mind your credit score may decrease slightly when you initially take out the loan due to the credit inquiry, new loan amount on your credit report and other factors. However, these are only temporary changes that’ll eventually have little to no impact as you pay down the loan amount and the student loan ages. 

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