It’s possible to have both student debt and excellent credit

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It’s possible to have both student debt and excellent credit


For millions of Americans, carrying student loan debt is an all-too-familiar part of their college experience. Within the class of 2014, about seven in 10 college seniors who graduated from public and private nonprofit colleges had student loan debt.

Some people may think that it's not possible to have excellent credit if you're carrying student loan debt. The good news is that this simply isn't true.

It is possible to have both student loan debt and excellent credit.

We looked at the credit profiles of Credit Karma members between the ages of 18 and 34 who have logged on since January 2015 and found that 34 percent of these millennials with an excellent (750+ out of 850) credit score also have existing student debt.

So how did they do this? Here are some things those millennials may have in common.

1. They have several credit cards.

Almost all 18- to 34-year olds with excellent credit and student debt -- 99.9 percent -- have one or more credit cards. These credit card holders carry an average of four to five credit cards.

For context, their peers with good credit (a score of 700 to 749) have fewer than four credit cards on average.

In general, consumers (across all age groups) with higher credit scores tend to have more accounts open, including credit card accounts.

2. They make regular on-time payments.

Your percentage of on-time payments is another factor that generally contributes to your credit score.

Young people with excellent credit pay on time 99.9 percent of the time. This almost-perfect record is unsurprising, as late or missed payments can really harm your credit score.

The opposite also holds true: Regular on-time payments can be beneficial for your credit score. If you have student debt, making your student loan payments on time can demonstrate to future lenders that you can be trusted to pay back money owed on time, and can be a good way to build credit.

3. Their credit card utilization is generally low.

Millennials with excellent credit and student debt have an average credit card utilization rate of 8 percent. This figure represents how much of their available credit they use on a monthly basis.

Millennials with good credit use 21 percent of their available credit on average -- a rate two and a half times greater -- and millennials with fair credit (a score of 640 to 699) use an average of 41 percent.

Many experts recommend keeping your credit utilization under 30 percent.

4. They rarely have accounts in collections.

Only 0.9 percent of 18- to 34- year olds with excellent credit scores have one or more accounts in collections on their credit report.

In contrast, around 4 percent of the same age group with good credit have accounts in collections on their report, as do 19 percent of those with fair credit.

(Note: An account in collections can stay on your credit report for about seven years, so it can still have an impact on your score years after the account went into collections, though this impact might decrease over time.)

5. They have a higher total credit card limit.

The average total credit card limit for millennials with excellent credit is $25,582, almost double the average total limit of $14,620 for their peers with good credit.

Although millennials with excellent credit tend to have higher credit card limits, their overall utilization of these limits is often lower. As mentioned above, they use about 8 percent of their credit limits, compared to those with good credit who use about 21 percent.

Of those who hold credit card debt, this translates to $2,027 in average credit card debt for the excellent credit group and $3,144 for the good credit group.

Benefits of having excellent credit

Maintaining excellent credit can have an impact across many different aspects of your life.

Credit can be a deciding factor for whether you'll be approved for a mortgage, car loan, credit card or another line of credit. Your credit score can also affect your apartment search -- from your probability of getting approved to the amount of your security deposit. In addition, it can impact the amount you're charged for home or auto insurance and play a role in whether you're approved for a cell phone plan.

In addition, an employer can pull your credit report (though generally not your credit score itself) in many states, and an excellent credit report could make you a more attractive candidate when you're looking for a job.

Having an excellent score could also save you a lot of money over your lifetime. With an excellent score, you may receive relatively lower interest rates for credit cards, auto and student loans and mortgages.

Based on typical borrowing patterns -- $826 in credit card debt, $13,387 in auto loan debt and $16,635 in student loan debt -- a 22-year old with excellent credit could save $811 in interest over a year compared to a peer with poor (300-639) credit, $589 compared to a peer with fair credit and $384 compared to a peer with good credit.

Wade's path to excellent credit

Wade Sobczak, a 28-year old senior support analyst in Melbourne, Florida, took out $25,000 in student loans nine years ago. Throughout carrying his student loan debt, which he is still paying off, he has maintained an excellent credit score.

How? Sobczak says, "I have six credit cards. I always pay the full statement balance -- I even have it on auto-pay so I can't mess it up. I [try never to use] more than 10 percent of my utilization."

He also shares that he has never missed a payment on any debt, including his student loan, which at times meant calling his student loan provider and applying for a forbearance to stop payments temporarily, or making the minimum payment.

Sobczak recommends making all your payments on time and keeping your credit card utilization low.

Limitations, even with excellent credit

While the benefits of having excellent credit can be significant, it's important to be aware that student loan debt can still limit your financial freedom in some cases.

If you want to buy a home, your student debt could affect your chances of securing a mortgage, where your debt-to-income ratio plays an important role. This ratio helps lenders measure your ability to repay the money you've borrowed, and is calculated by dividing your total monthly debt payments by your gross monthly income.

For example, suppose you have $500 in monthly student loan payments, $200 in auto loan payments and $300 in credit card payments. This means your total monthly debt payment is $1000. If you make $5,000 per month before taxes, your debt-to-income ratio is $1,000/$5,000, or 20 percent.

The Consumer Financial Protection Bureau requires that to obtain a Qualified Mortgage, a consumer must have a debt-to-income ratio that is less than or equal to 43 percent.

Continuing with the above example: A max debt-to-income ratio of 43 percent means you could have up to $2,150 in total monthly debt payments. But because you already have debt payments of $1,000, to secure a Qualified Mortgage you would have to get a mortgage that requires a monthly payment of $1,150 or less.

In other words, having student debt increases your debt-to-income ratio and therefore could possibly limit the type or size of mortgage you may qualify for.

Bottom line

Having student debt certainly doesn't disqualify you from having excellent credit. By engaging in smart credit practices, you too may be able to reap the benefits of an excellent credit score.

About the Author: Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over).

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