Research of the Week: Is There a Tie between Student Loans and Credit Health?

A new FICO study finds that credit health may be a slippery slope when you have student loans.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

FICO’s credit experts wanted to know if there was any correlation between student loans and credit health among young consumers. So, they identified 10 million consumers between the ages of 18 and 30 with at least one student loan in active repayment.

They looked at these 10 million credit profiles to see how many student loan borrowers exhibited healthy credit habits and how many exhibited negative credit habits. Healthy credit habits were measured based on who had FICO score increases and who had decreases between October 2016 and October 2017.

The big result

Out of the 10 million student loan borrowers they assessed, less than one in four (22%) saw their FICO scores increase. An increase meant that their scores improved by 40 points or more over the one-year period. By contrast, 15% saw their scores decrease by 40 points or more.

The majority (63%) were basically stuck in neutral – their scores didn’t decrease by more than 40 points, but they didn’t increase either.

The fascinating details

What the study really revealed was that for student loan borrowers, things can either go very wrong or very right. Those who saw their credit scores increase showed positive credit health signs across the board:

• They paid off an average of $3,176 on installment loans, like their student loans, over the one-year period
• At the same time, they reduced this average credit card balances by $923
• Only 25% had a delinquency reported, where a payment was late by more than 30 days
• Their credit inquiries from new credit applications decreased by 18%, on average.

Basically, this shows a trend that these borrowers were focused on debt repayment. They were not taking on new credit, they were likely to make payments on time and their overall debt decreased as a result.

By contrast, those borrowers that had credit score decreases seemed to struggle with a variety of credit challenges.

• They paid down almost half as much installment debt as those who saw their scores go up – only $1,802, on average
• Meanwhile, their credit card balances increased by $2,264
• They were three times more likely to have a delinquent payment – 75% had at least one delinquency
• Their credit inquiries from new credit applications increased by 9%, on average.

This data shows that borrowers who struggled to repay their loans were more likely to be credit dependent. They’re opening new credit lines more frequently and their credit card debt is on the rise.

What you can do

“Debt problems tend to be a slippery slope,” explains Gary Herman, President of Consolidated Credit. “When you face a challenge with one type of debt, it throws off your budget. You juggle bills and put expenses on credit because your income gets used up trying to keep up with student loan payments. You borrow more, charge more and often struggle to make all your payments. It can be a downward spiral.”

Herman says that people who feel like they’re slowly falling behind need to take action to turn things around. Sticking with the status quo means your debt problems are just likely to get worse.

“The good news is that once you take the first step to get things turned around, momentum usually starts to carry you in a positive direction,” Herman says.

This can be accomplished by finding solutions for each type of debt that’s creating challenges in your budget.

1. Find a solution for student debt that lowers your payments so they’re more affordable, such as income-based repayment plans.
2. Consolidate credit card debt so you have more money available for loan repayment.

“By lowering your student loan payments and consolidating credit card debt, you can fix your budget so you don’t spend more than you earn,” Herman argues. “This will help you avoid taking on new credit card debt to cover daily expenses and budget gaps. You can also start saving money, to give yourself some breathing room for unexpected expenses.”