Today, more than 70 percent of all college students graduate with education-related debt. As those students enter their post-college careers, many will begin considering other big purchases like a car or a home long before their student loans are paid off. Just how much they pay to finance these purchases will be determined, to a large extent, by their creditworthiness. Fortunately, having student loans won’t spell ruin for their credit scores.
What is a Credit Score?
Lenders typically consider your credit score when you apply for a new line of credit.
A good score can help you qualify for a loan, but it can also ensure that you receive a competitive interest rate. A less-than-stellar credit score can scare off reputable lenders, leaving you with only high-interest options.
While there are multiple credit scoring models in use today, there is one that dominates the market: the FICO score. According to FICO.com, the company’s scores are used by more than 90 percent of “top lenders”.
Like other credit scores, FICO scores are three-digit, mathematical representations of risk. In other words, a FICO score indicates to lenders how likely a borrower is to repay a debt.
Notably, there are multiple variations of the FICO score. Some, such as the FICO Auto score, help lenders to determine borrower eligibility for certain types of loans. Others are the result of updates to FICO’s scoring model. (Just as different companies may use different versions of the Microsoft Windows operating system, different companies may use different versions of the FICO score.)
What Factors Determine Your FICO Score?
While FICO doesn’t reveal the exact methodology they use to calculate credit scores, they do provide some general guidelines. FICO weighs the following factors:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix in use (10%)
- New credit (10%)
How Do Student Loans Impact My Credit Score?
According to FICO, student loans don’t receive any special treatment. Like mortgages and auto loans, student loans are installment loans, and they’re factored into a borrower’s credit score in just the same way as these other types of debt. What’s more, FICO doesn’t differentiate between student loans issued by private lenders and those backed by the federal government.
Like other types of debt, student loans can impact your credit, particularly when it comes to the payment history and amounts owed components of your score. But, this isn’t as bad as it might sound.
Does a High Student Loan Balance Mean a Low Credit Score?
Fortunately, a high student loan balance doesn’t always mean a low credit score.
By making your student loan payments on time, you can build a positive payment history.
And, when it comes to amounts owed, outstanding balances on credit cards are more likely to weigh down your credit score than student loans, according to FICO.
To help reassure those with student loans, the company notes “that approximately 7% of consumers with at least $50,000 in student loan debt have FICO credit scores in the 800s.” While that may not sound like a lot, only 19.9% of consumers in the general population have credit scores above 800.
The Bottom Line
Your FICO credit score plays an important role in your overall financial well-being. It can determine whether you’re approved for a line of credit and how much you’ll pay in interest.
Fortunately, a high student loan balance won’t prevent you from obtaining a positive FICO score.
Together, amounts owed and payment history make up 65% of your total FICO score.
When it comes to amounts owed, carrying high credit card balances will prove far more damaging than maintaining high balances on your student loans. And student loans that are paid on time can contribute to a positive payment history, which can improve your overall score.