How to Improve Your Credit Score When You Have Student Loans

If you’ve ever applied for a credit card, auto or home loan, you know the deal: Your ability to get a loan and the interest rate of that loan are dependent on your credit score. And those two things can have a huge impact on your overall financial health.

But did you know that as a student loan borrower, your student loans can affect your credit score? From the day you apply for your loans to the day you pay them off, your actions can have an impact — either positive or negative — on your credit score and, by extension, your future financial goals and well-being. Which means it’s crucial to guard your credit score throughout the student loan process.

In order to do this, you will need to know a little more about exactly how your student loans can affect your credit score. The calculations that the various scoring agencies (such as FICO and VantageScore) use are a bit of a black box, so we’ve compiled three key actions that are known to affect your credit, along with ways to leverage them. These tips will help you make smart decisions about your student loans while protecting your credit score.

Be a Savvy Shopper 

Interest rates matter — a lot. The lower your interest rate, the less money you’ll spend on interest over the life of the loan. For many in-school borrowers and those refinancing existing loans, this means shopping around for the best interest rate on a private loan.  

The problem is that in most cases, you won’t know the interest rate on your new loan until you actually apply for it, which means you may have to apply for loans with multiple lenders in order to find the best rate. Since applying for a loan usually requires the lender to make an inquiry into your credit — and multiple inquiries can negatively impact your score — some borrowers worry that comparison shopping can actually be a bad thing.

The good news is that scoring agencies attempt to distinguish between a search for a single loan and a search for many new credit lines, so as long as you do your rate shopping during a concentrated period of time (between 14 and 45 days) and keep it to a single product (i.e. only student loans), you should be okay. 

If you really want to avoid inquiry overload, do your research before applying for a loan. Private lenders usually state the range of rates they offer on their websites, as well as general eligibility criteria (so you have a good idea whether you’ll qualify before you apply). 

You can also check to see if they’ll tell you the interest rate you would receive without doing a “hard” credit pull, which may affect your score. For example, if you qualify for pre-approval with SoFi, you can see an estimate of your interest rate before a formal credit check occurs. You won’t be able to get your student loan — or most loans for that matter — without a full review of your credit report and verification of some key information, but this service allows borrowers to shop around first.

Make On-time Payments a Must

There’s a lot of debate out there about whether student loans constitute “good debt” or “bad debt” when it comes to your credit, but the simplest answer is that they can be either — it just depends on how wisely you manage them.  

So how do you keep your student loans in the good debt category? Pay on time, every time. Even if your credit history is pristine, it only takes one report of being 30 days past due to materially change your score. Although it’s understandable that, as a recent grad, sometimes you might be short on cash or even simply forget to make a payment, the scoring algorithm doesn’t know that and, frankly, doesn’t care. 

If you’re at all concerned about remembering to make payments, set up an automatic payment plan. In fact, you should probably do that anyway — some lenders will even give you a small interest rate discount for doing so.

If you lose your job or are unable to pay for other reasons, your best bet is to call your lender immediately. Federal student loans and some private student loans include protections such as deferment and forbearance, which can give you temporary relief and often minimize the impact to your credit. Keep in mind that, in most cases, interest continues to accrue and is capitalized at the end of the deferment or forbearance period. For example, SoFi’s Unemployment Protection feature not only allows borrowers who’ve lost their jobs to suspend loan payments for a set period of time, but also helps them find a new job through its Career Services program.  

Refinance to Reduce Your Debt

One significant factor in the credit scoring algorithm is the amount of debt that you have (including both installment debt, like student loans, and revolving debt, like credit cards). Owing lots of money doesn’t automatically translate to a low credit score, but it can contribute to the scoring agency’s analysis of whether you’re “overextended” and, therefore, more likely to miss or make late payments.

Unfortunately, if you’ve got tens of thousands of dollars in student loans, it’s not like you can make your debt disappear in the blink of an eye. But there is one strategy that may allow you to pay your loan down faster and spend less money on interest to boot. That strategy is refinancing your loans at a lower interest rate.  

In addition to accelerating your debt payoff, refinancing may also allow you to combine multiple loans, simplifying your monthly bill and payment. And if you refinance your federal loans with a private lender, rest assured that credit bureaus don’t view the two types of loans any differently.

Credit is a powerful tool that can allow you to do a lot of positive things in your life, but if you’re not careful it can also hold you back. The best thing you can do is educate yourself now about how your student loans affect your credit score so that your future can be as fulfilling as your education was.

This article does not purport to provide legal or tax advice. It is meant to provide general information of interest to readers who have student loans.

Daniel Macklin is a member of the DailyWorth Connect program. Read more about the program here.