For thousands of new doctors of osteopathic medicine, student loan debt is a heavy burden.
In 2016, new osteopathic physicians who borrowed to pay for school carried roughly $240,000 in debt into their careers, according to the American Association of Colleges of Osteopathic Medicine.
If handled badly, that mountain of debt can severely hurt your credit score. This matters because you need a solid credit score to get the best rates on a mortgage or car loan.
By far the most commonly used credit score is the FICO score, created by Fair Isaac Corp., also known simply as FICO. The company estimates that 90 percent of the biggest lenders use the FICO score when making credit-based decisions.
For this reason, it’s important to know how that score is calculated and what you can do to keep it high.
What impacts your score
Your loan payment history accounts for 35 percent of your FICO score. In fact, no other single factor has as big an impact on your score.
“If you miss payments, your credit scores will suffer significantly,” says Gerri Detweiler, a longtime credit expert, financial author and host of Talk Credit Radio.
It’s difficult to overstate the damage that late payments can inflict on your credit score. MyFICO—the consumer division of FICO—says a payment that is just a few days tardy can have a “major negative impact” on your FICO score.
So, it is crucial to make your student loan payments on time without fail. MyFICO recommends you ask your bank to set up automatic payment reminders via email or text message.
How student loans can help your credit score
Somewhat surprisingly, your student loan debt also offers you an opportunity to boost your credit score over time.
New doctors who pay off their student loan debt on schedule show that they can handle credit responsibly. That causes their credit scores to rise.
“Student loans paid on time can provide a positive credit reference that enhances your credit scores,” Detweiler says.
Your credit mix also has an impact on your credit score. It accounts for 10 percent of your FICO score. When weighing the mix, FICO looks for various types of accounts, including:
• Credit cards
• Retail accounts
• Installment loans
• Finance company accounts
• Mortgage loans
Student loans are a type of installment loan. Having such a loan on your record further enhances your credit profile.
“A student loan is reported as an installment loan, and can help someone who only has revolving accounts like credit cards,” Detweiler says.
Finally, having a student loan can help boost your score because your length of credit history makes up 10 percent of your FICO score. So, a student loan can start the clock on your credit history, especially if you don’t already have a credit card.
When a good credit score isn’t enough
Detweiler cautions that even if your credit score is excellent, your debt load might hurt your ability to land a mortgage or car loan.
That is because your debt-to-income ratio has a big impact on whether or not a lender decides to issue a loan to you. This ratio measures how much of your income goes to pay off debts. The higher the ratio, the lower your chances of being approved for a loan.
“Your credit scores could be fine, but your debt ratio may be too high,” says Detweiler, who also serves as education director at NAV, which helps small business owners manage their credit and access financing.
To avoid such a fate, make sure to pay down school loans and other debts vigorously.
Regardless of how much student loan debt you’ve accumulated, things should work out fine in the long run as long as you make payments on time.
“Student loan debt generally won’t hurt your credit scores unless you fall behind or default,” Detweiler says.