A student loan can be a valuable tool in helping someone reach their education and career goals. Access to financing is crucial when it comes to being able to enroll in a program — after all, even a relatively inexpensive education can still cost thousands of dollars. But in addition to impacting your finances and your education, can a student loan affect your credit score too? Here, we’ll take a look at how student loans and your credit relate to each other.
Impact of a credit report pull
When it comes to federal loans, the good news is that (with the exception of Direct PLUS Loans) they don’t require a credit check — because of that, the act of simply applying the loan won’t impact your credit score. For private loans, on the other hand, lenders will often base their approval on the applicant’s credit history, and so will pull their credit report upon application. A hard credit pull can result in a temporary dip in your credit score.
As with other private lenders, at Climb we perform credit pulls in order to evaluate applications. However, we know how important it is to fully understand the terms you’re agreeing to with something as important as educational financing. So, we only perform a soft credit pull upon initial application, which has no impact on credit score. A hard credit pull is only performed once a loan is funded, so people can take out an application just to check their rates or reapply with a co-borrower with no effect on their credit score.
Impact of on-time payments
The relationship between student loans and credit doesn’t begin and end with the application, though. This is why it’s important to continuously make on-time payments. In doing so, you’ll build a history of on-time payments, increase the average age of accounts on your credit, and boost your credit mix — all of these could help build up your credit.
Impact of late payments
While on-time payments can positively affect your credit, a series of late payments can do the opposite. Once a loan has been late for a certain number of days, the servicer will report it to the credit bureaus. This will negatively impact your credit, and it can stay on your credit report for years. Left unpaid, this will eventually result in your loan going into default, which comes with myriad consequences, including loan acceleration; loss of eligibility for additional loans, deferment, or forbearance; wage garnishment; and more.