For many young people, a student loan is the first step to establishing a solid payment history and building good credit. And with a good credit score, you can qualify for credit cards and charge cards all on your own without needing an assist from your parents as your cosigners. So, if you manage them well, your student loans can actually help you get a credit card, as well as other forms of credit like an auto loan or a mortgage.
But, manage your student loans poorly and it can be bad for your credit, and potentially keep you from qualifying for a credit card.
It’s important to keep your accounts in good standing, which means never being late or delinquent with your loan payments and working to chip away at the balances. Falling behind on your student loan payments will significantly lower your credit score and make it difficult for you to qualify for other credit accounts, including credit cards. Credit scoring models also consider the amounts you owe on existing debt, so if you’re not actively paying down your student loans, your credit score may suffer. For example, if you’re not in repayment (like when you’re in school, grace period, deferment or forbearance), your loan balances may increase because they’re accruing interest. To improve your credit, you want your debt balances to go down, not up.
Good credit can help you qualify for credit cards with lower interest rates, which means you pay less in interest charges on any balances you carry. If your credit scores are low, however, you’ll get higher interest rates on credit cards, or you may not qualify for a traditional credit card. Instead, you may want to consider a secured credit card, which requires a deposit to establish a credit line, and is typically used to build credit.
So do everything you can to pay your student loan payments by their due dates. If you are struggling with managing multiple student loan payments, see if you qualify for a consolidation loan. That way you’ll have one payment to make every month instead of six or eight.
And if you are struggling with student loan payments because of a financial hardship, be sure to reach out to your student loan servicer as soon as possible, before you fall behind on your payments and damage your credit record.
You may be eligible for a deferment or forbearance of your student loan payments, allowing you to temporarily postpone your loan payments while you get back on your feet financially.
If you don’t qualify for deferment or forbearance, ask your lender about making changes to your repayment plan so you can more easily meet your monthly student loan payment under your current financial circumstances. You can read more about your options for repaying your student loans here. Until your student loan servicer has approved a new repayment plan, protect your credit by continuing to make your payments on time.
While paying down your student loans, you can track your credit-building progress by reviewing your credit scores for free, which you can do on Credit.com. You’ll get two free credit scores, plus a personalized plan to help you build your credit.
This article has been updated. It was originally published July 10, 2014.