It’s easy to be disappointed by your student loan debt. Not only do you have to pay back thousands of dollars, but interest adds up. It eats away at your hard-earned dollars and could hold you back from buying a home or marriage.
But while student loan debt can be a huge risk, it can also help you build your credit. If you’ve ever asked yourself, “How can I build my credit?” here are a few ways that student loans can give your credit a boost.
Your credit impacts everything you do
Credit affects everything. Your credit score represents your creditworthiness. The better the history, the higher the score.
Your score is calculated using your credit history and credit utilization, which is how much credit you’re using versus how much you have available. It also includes how long you’ve had credit and the variety of accounts you hold, from credit cards to student loans and car loans.
Looking to buy a home or car? Your credit will be checked. Need to move into your own apartment? Better have good credit. In some cases, your credit is a factor in employment decisions too.
If you have poor credit, or no credit history at all, accomplishing basic goals, such as renting an apartment or getting approved for a credit card, can be difficult. Having good credit can help you get better interest rates on student loan refinancing, car loans, and more.
How can I build my credit?
Student loans are installment loans. These differ from revolving credit lines, such as a credit card. Installment loans are provided once and paid back over a set period of time.
Nick Ducoff, co-founder of Edmit, an online resource for researching college costs, said student loans are helpful for young adults who aren’t ready to sign up for revolving credit.
“Paying back your student loans on time can positively impact your payment history and the amount owed,” Ducoff said. “Just staying on top of your student loans is enough to increase your credit score [to] the 700 range by the time you have to apply for a larger loan.”
Installment loans affect your credit profile, but how they affect it depends on you. It doesn’t matter if you have federal or private student loans. What matters is that you’re responsible with your debt and make on-time payments.
Paying back your student loans on time will build up your credit and improve your credit score.
How to improve credit with student loans
If you have student loans, there are a few things you can do to ensure your loans are helping you build good credit.
1. Make all your payments on time
“Using your student loans to build your credit isn’t always easy, but it is simple: Complete every payment in full, on time,” Ducoff said.
Creditors look at your payment history to determine your creditworthiness. If you’ve missed or made late payments, your credit score will suffer for it. While payments aren’t the only thing affecting your credit score, they’re the largest determining factor.
If you find yourself running late on payments, it’s time to make a plan.
“It’s important to know your capacity, both financially and personally, to make on-time payments every month, and then to set a system that will prevent you from ever missing a due date,” Ducoff said.
Missing payments can hit your credit report hard. Late payments will stay on your credit report for up to seven years. If you had a late payment put on your credit report today, it wouldn’t go away until 2025. Plus, the more payments you miss, the more delinquency marks you get on your report, which means the more your score plummets.
To help keep your payments on track, use autopay through your loan servicer. It deducts payments from your bank account each month. You can also set calendar reminders to make sure you submit your monthly payments.
2. Make your payments affordable or get help
If your payments are overwhelming and you struggle to make them each month, you might periodically skip one or two. But remember rule No. 1: Always make on-time payments.
So what should you do if you can’t afford your payments?
Talk to your loan servicer and see what options are available for your situation. You might be eligible for an income-driven repayment plan or deferment until you get back on your feet.
“If you find yourself in a tough spot and cannot make a due date, you should contact your lender right away to discuss payment options,” Ducoff said. “Lenders don’t want you to become a credit risk; they have incentives to work with you to find a repayment plan that you’ll be able to meet.”
Ducoff warned that waiting past even one missed payment could mean interest starts piling up. That would make it harder to regain control of your payments. You might be eligible for deferment or forbearance, where you can temporarily pause payments without hurting your credit.
3. Consider student loan refinancing
Keeping your student loans in good standing is a great way to build credit. But managing multiple loans can be overwhelming.
If you want to make your loans more manageable, you could consider student loan refinancing. Refinancing means you’ll make one loan payment rather than many different ones. If you qualify, you could save by reducing your interest payments.
Refinancing can help keep your payments on track. That’ll help you build good credit.
Use your student loan debt to build credit
Student loans can play a positive role in building good credit, as long as your payments are manageable and you keep up with them.
Doing so can help you in other areas of your life. With good credit, you might be eligible for other credit-building incentives, such as lower rates on a mortgage or car loan.
Paying off your student loans might seem daunting, but doing it the right way will help build your credit and your financial future.