Updated: Jun 05, 2023

4 Ways Student Loan Debt Can Tank Your Credit

Student loan debt can have serious consequences for your credit score as well as your budget. Here are 4 ways student loan debt can lead to bad credit.
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Student loan debt has become a fact of life for many grads, hovering right around $30,000 on average for those who borrowed to cover at least part of their education. The financial pressure it creates can be overwhelming, but it's not just your budget you have to worry about.

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Activity on your student loan accounts is reported to the credit bureaus, just the same as a credit card or another type of loan. If you're having trouble juggling all of your obligations, it could put your credit score on the chopping block. When your score drops, it makes it that much harder to get new credit or loans down the line, which can be a major stumbling block if you'd like to buy a car or a home at some point. If your student loan debt contributes to bad credit early on, it can take years to undo the damage. Your best bet is to avoid doing these four things that could knock points off your score.

1. Paying late or missing payments

When you haven't been out of school that long and you're still trying to get a grip on how to manage your money, it's possible that you could pay your loans late or miss a payment altogether. While lenders understand that accidents happen, you shouldn't expect them to give you any leeway when it comes to your credit.

Any time you pay late or skip a month, it's going to show up as a negative mark on your credit history. If you let the loans go unpaid long enough, you run the risk of ending up in default. Even if you're able to get your account up-to-date, the default can linger on your report for up to seven years. Federal borrowers can erase delinquencies on their credit through student loan rehabilitation but that option doesn't exist if you default on private loans.

If you get to the point where you don't think you're going to be able to pay your loans on time, sidestepping your lender isn't the answer. In fact, you should reach out as soon as possible to see what your options are. Recent grads, for instance, may be able to get a deferment, which lets you put off payments for a set period of time without having to worry about accruing additional interest. When meeting the minimums on time is an ongoing struggle, it may be a sign that you need to look into income-driven plans that can lower your monthly payment.

2. Using deferment or forbearance unnecessarily

Deferment is designed to help out students who can't pay because of a financial hardship. A forbearance is sort of the same thing but the biggest difference is that the interest will keep on piling up during the period where you're not making payments. While neither one will directly impact your credit score, you may still experience some negative effects if you're not approaching them correctly.

For example, your payment history accounts for 35 percent of your FICO score. If you're not paying on the loans because of a deferment or forbearance and you have no other credit accounts, you're not doing anything to help build your credit history. Waiting too long to request either one can also hurt you if you end up missing payments prior to getting approval.

The amount of debt you owe factors into how your score is calculated so if the interest is still adding up during a forbearance period, it could cause your balance to balloon substantially. Unless you absolutely can't afford to pay anything, you might be better off going with an income-based repayment plan to avoid deferring your loans or taking a forbearance altogether.

3. Seeking consolidation loans from multiple lenders

Consolidating federal loans or refinancing what you borrowed through private lenders is an excellent move if you're trying to lower your monthly payments and shave a point or two off your interest rate. It's particularly help for students who have racked up a significant amount of private loans, since the rates tend to be higher than federal loans. While consolidating or refinancing may actually boost your credit, applying for a loan could put your score at risk.

Lenders aren't just going to take your word for it when deciding whether to approve you for a consolidation loan. They're going to check your credit, which shows up as a "hard pull" on your report. If you're shopping around with a bunch of different lenders trying to get the best deal, it's going to hit your credit every time you apply and cause your score to drop a few points each time. Checking out refinance rates on sites like Student Loan Hero can give you an idea of which lenders have the best deals so you're not wasting your time or putting your credit score at risk when you apply.

4. Paying your loan off early

It might seem contrary to common sense but the reality is that knocking out your student loan debt a little early can actually cause your credit score to go down instead of up. Student loans are categorized as installment debt on your credit report, which means it's not a line of credit you'll draw on again, like a credit card.

Your score is determined based in part on the mix of credit you have, including installment loans and revolving accounts. When you zero out your loan balance ahead of schedule, it no longer weighs as heavily in your score calculations and you might even see it take a temporary dip.

Dumping your student loan debt as quickly as possible is certainly a smart move but you should be aware of how can affect your score in the short-term. Paying all of your bills on time and keeping your other debt balances low can help to offset the loss of the installment account so you don't feel the sting as much.