Navigating student loan debt can be challenging, but responsibly managing your student loans can actually benefit your credit score – not hurt it. Student loans can contribute to a strong credit history, provided you follow best practices in managing your repayments. Here, we’ll explore how you can use your student loans to enhance your credit score and look at strategies to maintain and improve your financial health.
How to Improve Your Credit Score When You Have Student Loans
Understanding how student loans impact your credit can help you stay on top of your finances. Learn how to manage your credit score even when you have student loans.
Published September 18, 2024
8 min read
Understand your credit score
Before diving into the specifics of student loans, it’s essential to understand how your credit score works. Various factors influence your credit score, including your payment history, credit utilization, length of credit history, credit mix, and new credit accounts. Exactly how your credit score is calculated can vary by scoring model, but in general, when you demonstrate a history of paying back multiple types of debt on time, your credit score will gradually increase.
If you’re a recent graduate, student loan repayment can be crucial to your credit profile. When managed responsibly, it can contribute positively to your credit score. That’s because regular, on-time payments demonstrate your reliability as a borrower.
Make payments on time
Your payment history is the biggest factor in your credit score – it accounts for 35% of your FICO score. Late payments on any outstanding debt, including credit card balances or student loans, can negatively impact your credit score and stay on your credit report for up to seven years. Late student loan payments may also affect your eligibility for federal benefits, including loan forgiveness programs. On the other hand, staying on top of your payments can help improve your credit score over time.
Set up automatic payments
Setting up automatic payments or reminders can ensure your bills are paid on time each month. This helps you avoid late fees and build your credit score with a positive payment history. Some lenders, such as Laurel Road, offer convenient AutoPay options that make this process even easier.
Use credit cards wisely
Your credit score also depends on your credit utilization – the percentage of your total credit limit in use. For example, if you have $250 in credit card debt, one card with a limit of $1,500, and another with a limit of $500, your utilization is $250/$2,000 or 12.5%. The amount of credit card debt you have also contributes to your debt-to-income ratio, or the monthly debt payments you make relative to your gross monthly income.
Reduce your credit card balances
Limit new accounts
Keep older accounts
Reduce your credit card balances
Keeping your credit card balances low relative to your credit limit –or, ideally, paying off your credit cards in full each month – can help improve your credit score.
Limit new accounts
Be cautious about opening new credit accounts or taking on new debt. New credit accounts make up 10% of your FICO score. Each new credit inquiry can lead to a temporary dip in your credit score. A hard inquiry can affect your credit score for up to a year and appear on your credit report for up to two years. A flurry of credit applications in a short period can also signal that you’re taking on more debt than you can handle, making you riskier to lenders. By being deliberate about new credit applications, you can protect your credit score from unnecessary drops.
Keep older accounts
Keeping older credit accounts open can also benefit your credit score. Long-standing accounts can positively contribute to your credit history length, which makes up 15% of your FICO score. A longer credit history can give lenders a better idea of how you’ve borrowed and repaid debt over the years. Even if you rarely use your older accounts, keeping them open can help improve your credit utilization ratio. Just be aware of any annual fees that might negate these benefits.
What is a Soft Credit Check vs. a Hard Credit Check?
Stay informed about your credit mix
Credit mix, or the different types of credit accounts you have, makes up 10% of your FICO score. Managing various types of debt well, such as student loan and credit card debt, can show lenders you’re a reliable borrower. Credit mix doesn’t impact your credit score as much as payment history or utilization, and it’s generally not a good idea to take on new types of debt just to improve your credit mix. However, having student loans can help diversify your credit portfolio.
What is your FICO score & why does it matter?
Know your student loan repayment and forgiveness options
Staying on top of your student loan payments can help improve your credit score, but if the payments become difficult to fit into your monthly budget, it’s worth exploring what options you have to make repayment more manageable. If you have federal student loans, you could be eligible for student loan repayment and forgiveness programs such as Income-Driven Repayment (IDR) or Public Service Loan Forgiveness (PSLF), depending on factors such as income level, employment type, and loan type.
Through an IDR plan, you could reduce your monthly payment amount based on your discretionary income. A lower monthly student loan payment can mean being able to better manage other types of debt, leading to an improved credit score. These plans also offer eventual forgiveness on your remaining debt after a determined period of repayment. For more detailed information about IDR, visit these resources:
- How to Get Student Loan Forgiveness with IDR
- How to Apply for an IDR Plan
- How to Apply for Student Loan Forgiveness
For more personalized advice and assistance, consider getting in touch with one of Laurel Road’s student loan specialists.
Check for credit report errors
Review your credit report regularly for inaccuracies. Mistakes can negatively impact your credit score, so it’s important to promptly dispute any errors with the credit bureaus and the lender that provided the incorrect information.
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