Sure, having a lot of student loan debt can be stressful. But one thing you shouldn’t stress about—believe it or not—is how student loan debt affects your credit score.
Why is that? Because student loan debt can actually help your score, as long as you never miss a payment.
That last part is crucial. Making a mistake with your student loan—such as skipping payments or letting the loan go into default—can hurt your score.
That’s why it’s essential to make sure your monthly payments are low enough to be manageable, so you can continue to stay current on your loan even if your financial circumstances change.
One of the easiest ways to lower your monthly payment is through refinancing. Here’s a look at how student loans can bolster your credit—and how refinancing can help.
1. They help you establish a credit history early on
It may sound counter-intuitive, but having no debt doesn’t guarantee a perfect credit score.
If you have no debt history and you’re applying for a loan, banks will have no information on how you will treat that loan. Often, they’d rather see a history of consistent repayment than no debt at all.
Student loans can help you build a record of steady repayments as soon as you leave school—or earlier.
2. They diversify your credit mix
Having more than one type of loan can also help your credit score. It’s not as important as an established record of long-term payments, but it does make a difference—especially if you have a mix of revolving and installment loans.
An installment loan is debt you take out and repay over time until you achieve a zero balance, like a student loan or a car loan. Revolving loans are lines of credit, like credit cards, where your balance may go up and down over time.
If you have both credit cards and student loan debt, this can strengthen your score—by showing how adept you are at managing different types of debt at the same time.
3. They’re stable, long-term debt
Student loans come in all sizes, but the average amount for a Class of 2016 graduate is $37,172. Your student loan may be the largest loan you carry until you’re ready for your first mortgage.
Whatever your student loan debt is, having a history of steady, consistent repayments on a big installment loan can strengthen your credit record.
Of course, you can only keep your payments steady if they’re low enough to afford through thick and thin. That’s where refinancing, consolidation, and income-driven repayment plans can help—by reducing your monthly payments to an affordable level.
4. The total amount of your debt matters less than you think
You might be tempted to throw all your extra cash at your student loan and try to pay it off quickly. This may be the right choice for some people, but it isn’t necessarily best for your credit score.
One misunderstanding about credit scores is that a large total amount of debt hurts your score. That’s more true of credit card debt than it is for student loans, where your record of steady payments matters more than the amount of the loan overall.
You are, however, penalized for having a high monthly debt-to-income ratio. If you’re putting a large percentage of your monthly paycheck toward meeting a high minimum student loan payment, your credit score might be worse than it would be if you made smaller, more manageable payments.
Reducing your monthly student loan payments reduces your monthly debt-to-income ratio, which boosts your credit score.
Refinancing your student loans is a fast and highly effective way to reduce your monthly student loan payments and improve your debt-to-income ratio—making your student loan more likely to help your credit. In fact, many people are able to lower their monthly payments by over $200 per month.
Are you Refi Ready? It only takes 10 seconds to find out how much you could save.