Do Student Loans Help Build Credit?

by Raptor Staff on October 11 2022

Yes, student loans can help build credit. Making on-time payments on your student loans can lay the foundation for building a strong credit history. This is one of the first ways that many individuals get started with building credit. But student loans can also hurt your credit if you’re not careful. If you’re wondering how do student loans help build credit, here’s what you should know. But first, it’s important to know what factors affect credit scores.

Student loan helping student build credit.

Factors That Affect Your Credit Score

There are five main factors that go into calculating your credit score:

  1. Payment history – Making consistent on-time payments helps add points to your score slowly and steadily. On the other hand, missed payments shave points from your score.
  2. Credit utilization ratio – This calculates how much you owe compared how much credit you have. Keeping your credit utilization ratio low adds points to your score. A high ratio will hurt your score.
  3. Length of credit history – A longer credit history has a positive effect on your score. It gives prospective lenders an idea of how well you’ve handled credit over time.
  4. Credit mix – A mix of installment loans (all types of loans) and revolving accounts (credit card) shows lenders that you have experience managing multiple types of debt. This helps add a few points to your score.
  5. Hard credit inquiries – When you apply for a loan or credit card, it triggers a hard credit inquiry. This can pull your score down by a few points. Too many hard inquiries suggest that you’re financially stressed. This could damage your credit score.

How Student Loans Help Build Credit

You know which factors affect your credit score. Now here’s a look at how your student loans have a positive effect on your credit score.

1. Student loans give you an opportunity to build your score with timely payments – Payment history has the single biggest impact on your credit score. This includes payment history on loans as well as credit cards. As a student your lines of credit are limited. You may or may not have a student credit card. But you’re sure to have student loans. Making on-time payments on your student loans is the fastest way to build credit.

2. Student loans add to the length of your credit history – The earlier you get a line of credit, the more years you can add to the length of your credit history. A longer average age of credit accounts could add points to your score. Your loan account history starts from the time your loan funds are disbursed. This is even if you start making payments only after the grace period, which is six months after graduation.

3. Student loans add to your credit mix – Even if you have a credit card as a college student, it still counts as one type of credit account. As we said earlier, lenders like to see a mix of credit accounts. Your student loans add diversity to your credit accounts. This will help add points to your score.

Can Student Loans Hurt Your Credit?

Yes, unfortunately, student loans can hurt your credit. Missed payments and late payments do the most damage to your credit score. Even one missed payment on your student loan will knock a few points off your score. This stays on your credit report for up to 7 years. Prospective lenders will be reluctant to approve you for a loan when they see this entry.

How To Use Student Loans to Build Credit

Here are a few ways to use your student loans to build a good credit score:

1. Make all payments in full and on time

Making all payments in full and on time is the fastest way to use your student loans to build credit. Just staying on top of your student loan repayments is enough to build your score.

2. Set up auto-pay if you keep missing payment deadlines

If you miss payments because you keep forgetting the deadline, consider setting up auto-pay. With auto-pay, the loan payments are deducted from your bank account and transferred directly to the lender on the set date. You don’t have to keep track of due dates. Missing payments can hit your credit score hard. Do whatever it takes to make sure that all those payments go out on time.

3. Enroll in an income-based repayment plan to make payments more affordable

You know the importance of paying student loans on time and in full but what if you just can’t afford the payments? If you find the monthly payments unaffordable, consider switching your loans to an income-based repayment plan. You can only do this with federal student loans. Income-based repayments are designed to make payments more affordable and lower your risk of defaulting on your loan.

4. Keep your credit utilization low

The amount you owe on student loans compared to the loan balance can also affect your credit score. The smaller your loan balance, the better. Try and pay down as much of your student loans as you can as quickly as you can. As you pay down the debt, the lower balance can help boost your scores.

5. Consider refinancing your student loans

Managing multiple loans can get overwhelming. It also increases your chances of missing payment deadlines. Refinancing allows you to combine multiple loans into one loan so you make only one payment a month instead of several. Keeping your payments on track will help in your credit-building endeavor.

And if you qualify for a lower interest rate, you’ll save a lot of money too when you refinance your student loans.

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.