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Here's how student loans show up on your credit report and impact your credit score

Student loans are a type of installment loan, which means they appear on your credit report.

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If you have student loans in your name, you can find them on your credit report under installment loans.

Similar to an auto loan or mortgage, student loans are a type of loan that gives borrowers a finite amount of money to pay back in a fixed number of monthly "installments" over a specified amount of time.

Because student loans appear on your credit report, they also get factored into your credit score. Here's what you need to know.

How student loans show up on your credit report

Student loans show up on your credit report in two ways.

Firstly, when you apply for a student loan and the lender does a credit check, it will result in a hard inquiry on your credit report (if done in the last two years). Whenever you apply for a credit card or any other type of loan, the lender or credit card issuer will pull your credit report from one of the three main credit bureaus (Experian, Equifax or TransUnion), also known as a hard inquiry (or "hard pull"). A hard inquiry can actually ding your credit score a few points, regardless if you end up being approved or denied for the new credit.

Why you should shop around before applying for a private student loan

If you are looking to take out a student loan from a private lender (or refinance your federal loans), you can see what interest rate you would likely get approved for by prequalifying. Before you actually apply and get a hard inquiry on your credit report, take advantage of lenders' prequalification tools. The lender Sofi, for instance, has a "Find My Rate" button on its website. Upon entering your information (this is called a "soft pull"), you'll receive a rate quote that will let you decide if you want to submit an actual loan application (that may result in a small ding to your credit).

Secondly, the actual student loan will show up on your credit report under "installment loans" once you are approved and take the loan out. Even though your student loans show up on your credit report, however, your actual loan balance doesn't matter as much as your payments on that loan do. Lenders want to see that borrowers make on-time payments on their loans as long as they are in active repayment.

If you end up falling behind on payments or defaulting on your student loan, that's where the loan's appearance on your credit report can be damaging. "The negative account information will likely appear on your credit file for seven years from the original date that the account was first reported as past due," Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), tells CNBC Select.

How student loans on your credit report impact your score

Student loans on your credit report can be good or bad for your credit score.

Since student loans are a type of installment credit, having them on your credit report adds to your "credit mix," which makes up 10% of your score calculation. This is good for your credit since it adds variety to the kind of loan products you have and shows you can manage different types of debt. Take note, however, that there are risks to carrying a big installment loan, such as a substantial amount of student debt. The continuous payments may make it more difficult to save. In addition, the large debt load boosts your debt-to-income (DTI) ratio, which can influence your ability to borrow more, such as a mortgage loan.

How else student loans affect your credit score depends a lot on how you manage your monthly payments. Payment history is the most important factor in determining your credit score, accounting for 35% of its calculation.

If you make your monthly payments on time, student loan debt won't necessarily harm your credit score. On the other hand, if you are late on payments (considered "delinquent"), in default (late on payments for 270+ days) or see your debt go to collections, this can cause your credit score to drop.

"Any delinquent account that appears on your credit report can have a noticeable and negative impact on your score," McClary says.

Exactly when your late student loan payments get reported to the credit bureaus differs between whether you have federal or private loans. Generally, however, federal student loans are a bit more lenient with borrowers.

Federal student loan borrowers won't see their delinquency, or missed payments, reported until they are 90 days past due. If you had one missed payment or you didn't have the money at the time, this means you have about three months to catch up.

Private student loan borrowers may not have as much time since private lenders can make up their own rules. Since each lender is different, contact your servicer as soon as you think you will be missing any payments to see what your options are.

Bottom line

Treat your student loan the same way you would treat any other loan product, and that means making your payments on time each month.

In the current state of affairs amid the pandemic, remember that President Biden has extended the payment pause and interest waiver for federal student loan borrowers until at least October 2021. This student loan forbearance will not have an impact on your credit score.

For private student loan borrowers specifically, ask your servicer what relief options are available to you and, if you have good credit and a stable income, you might consider taking advantage of low interest rates and refinance any private loans that are costing you too much over time.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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