Missed student loan payments during 'on-ramp' may still hurt your credit score. Here's why

Borrowers may be tempted to skip student loan payments and instead spend their money on gifts, meals and decorations for the holidays. After all, the pressure to give and entertain grows only more intense as Christmas and New Year's draw closer.

But doing so could ding your credit score, experts warn. 

The Biden administration promised borrowers an “on-ramp” through Sept. 30 so those who don’t make payments aren't reported to credit bureaus, considered in default, or referred to collection agencies for late, missed or partial payments. But it also noted that “we do not control how credit scoring companies factor in missed or delayed payments.” 

So, while it’s true that nonpayers are shielded from the harshest consequences of late, missed or partial payments, they need to remember that interest will continue accruing and swell their balances. That growing balance is what could depress your credit score, experts say. 

“If the increasing outstanding balance on that loan is reported to the credit bureaus, that could result in a modest negative impact to the score,” said Tommy Lee, senior director of analytics and scores at credit scorer FICO. 

Learn more: Best personal loans

How exactly is your credit score calculated? 

Though each credit scoring company has its own formula to calculate credit scores, they all consider five factors: 

• Payment history: The most important information any credit scoring model considers is whether you pay your bills on time. For example, the bulk of your FICO Score − 35% − comes from your payment history. 
• Amounts owed: How much debt you’re carrying also affects your credit score; it accounts for 30% of your FICO score. Credit utilization − the percentage of your available credit in use on your credit cards − can have a major impact on your credit score.  
• Credit history: A longer track record of managing credit can help your credit score. Length of credit history is worth 15% of your FICO score, for example. To determine the length of credit history, FICO looks at various factors, including the age of your oldest account, the age of your newest account, and the average age of all your accounts together. 
• New credit: When you apply for a new loan, credit card or other financing, a lender may make a hard credit inquiry, which is a credit check used to make a lending decision. A hard inquiry may cause a slight dip of less than 5 points, which can affect your score for about a year. One or two hard inquiries shouldn’t have too much effect, but too many in a short time could hurt your score.  This makes up 10% of your credit score.
• Credit mix: Various types of accounts − for example, having an auto loan, a mortgage, a personal loan and a few credit cards − is considered a plus. Credit mix is worth 10% of your FICO score. 

How much would your credit score dip if you made no student loan payments during the 'on-ramp'? 

The influence student loan debt will have on a credit score will vary from person to person, “depending on both the details of that consumer’s student loan(s) as well as their overall credit profile,” FICO's Lee said.  

Generally, lower balances are viewed positively. The converse is also true: If you're not paying down the student debt and the interest is accruing, making the balance swell, it can be a modest negative for your credit score, he said.  

How soon could you see your credit score dip? 

Account information is usually updated on credit reports monthly, and the credit score can be updated to reflect those changes immediately, Lee said. 

What can borrowers do? 

Borrowers who miss payments should monitor their credit reports and scores and try to make what payments they can to keep their balance in check. 

Some credit reports are provided free through financial institutions or other providers. All consumers can receive a free copy of each of their three credit reports from credit bureaus Equifax, TransUnion and Experian weekly through AnnualCreditReport.com or by calling 877-322-8228. 

If you can’t make any payments, review your payment options. Those include income-driven repayment plans based on family size and income that can lower your payments and fast-track you to forgiveness. The newest income-driven program, SAVE, is expected to generate the lowest payments for most borrowers and can be as low as zero for those with lower incomes. 

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What is a good credit score, and why is it important? 

Credit scores range from 300 to 850, and each lender decides what it considers a good credit score. But generally, a credit score of 670 or higher is considered good. 

However, if you hope to qualify for the best interest rates and terms from lenders and credit card companies and improve your approval odds, you should aim for a credit score of 740 or higher (very good credit or exceptional credit).  

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.