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Will a Huge Amount of Student Loan Debt Hurt My Credit Score?

Sept. 8, 2014
Credit Score, Personal Finance, Student Loans
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If you’re coping with a mountain of student debt, you have a lot on your mind. Aside from how you’re going to make the payments, you’re probably also worried about how your loans are affecting your credit score.

Don’t worry, the Nerds are here to explain all the important details about the relationship between student loans and your credit.

A big student loan bill won’t hurt your credit if you handle it responsibly

First, take a moment to let out a sigh of relief: A huge amount of student loan debt won’t necessarily hurt your credit score.

If you’ve done some preliminary research about the factors that affect your credit, you probably noticed that “amounts owed” accounts for 30% of your score. But this is most heavily influenced by your credit utilization ratio on revolving credit accounts, like credit cards. Since student loans are installment loans, they don’t have a big impact on this portion of your score.

In fact, your student loans could potentially help your credit. If you pay your loans on time and in full, you’re going to bolster the part of your score that’s determined by payment history. Because this makes up 35% of your overall FICO score, you could get a boost from handling your student loans responsibly.

Plus, having an open installment loan may also improve the 10% of your score that comes from the types of credit you have in use. Lenders like to see that you’re good at managing different varieties of borrowed money, so having both revolving and installment accounts on your credit report is beneficial.

But you could have trouble getting other loans

Although making your student loan payments on time is a good way to keep your credit score humming, it’s worth noting that a heavy student debt burden could still interfere with your ability to get other loans.

This might seem counterintuitive, because you probably know that good credit is key to qualifying for financing on competitive terms. But your student loans will have an impact on another key variable lenders look at when they’re deciding whether to extend you credit: your debt-to-income ratio (DTI).

Your DTI is the ratio of your monthly obligations to your gross monthly income. We’ll use an example to illustrate this point: Let’s say you’re making an annual income of $50,000 in your first job out of college. In this case, your gross monthly income would be $4,166.67 ($50,000/12).

Let’s assume you’re paying $800 per month in rent, $250 on your car payment, and $650 toward your student loans. Your total monthly obligations would be $1,700 ($800+$250+$650).

To figure out your DTI, you’d do a simple division problem:

$1,700 (your total monthly obligations)/
$4,166.67 (your gross monthly income) =
40.8% (your DTI)

Most lenders like to see a DTI of 36% or less; if your student loans are pushing your DTI above that mark, you might have trouble getting another loan.

Tips for managing your student loans

So it turns out that student loans can be helpful or hurtful when you’re trying to get financing for a car or a home after college. They could boost your credit score, but there’s also the possibility that they’ll drive up your DTI.

We have a few tips for successfully managing your student debt so that you’ll be well-positioned for a bright financial future:

  • Pay your loans on time every month, no matter what.
  • If your minimum monthly student loan payments are too high, communicate with your lender. You might be able to defer them for a period of time or work out an income-based repayment plan.
  • If you work in public service (as a teacher in a low-income school, for example), look into loan forgiveness programs you might be eligible for.
  • Consider consolidating. This could help you score a lower interest rate on your student loans, and it will help simplify making your monthly payments.
  • Consider paying more than the required monthly minimums. This will help you pay off your student loans faster, which will cause your DTI to drop.

Student loans image via Shutterstock