When managing your credit as a young adult, it’s easy to confuse which debts have the most impact. Student loans and credit cards are the most common forms of debt for people in their twenties, but many do not realize how differently these debts affect their credit score and future borrowing power.
At first glance, student loans may seem like the more “responsible” type of debt. They are often seen as a long-term investment in your future. They typically carry lower interest rates than credit cards and are associated with education and career growth. On the other hand, credit cards are known for high interest rates and the temptation of overspending.
However, how these two types of debt impact your credit score is not as straightforward as it might appear.
Student loans are installment loans. This means you borrow a fixed amount and repay it monthly over a set period. If you make those payments on time, your credit score can benefit because lenders want consistency and reliability. But there’s a flip side. If you miss a payment, it can be reported to the credit bureaus and remain on your credit report for up to seven years. Additionally, during periods of deferment or forbearance, interest may accumulate, increasing your overall loan balance and potentially skewing your debt-to- income ratio.
Credit cards are revolving debt. Unlike installment loans, credit cards allow you to borrow up to a certain limit and repay it flexibly. This debt directly affects your credit utilization ratio, which is the percentage of your available credit that you are using. This ratio plays a significant role in your credit score. Even if you pay your credit card bills on time, using a large portion of your credit limit can hurt your score. On the other hand, keeping your balance low and making consistent payments can quickly improve your credit standing.
So, which is worse for your credit score? The truth is, neither type of debt is inherently more harmful than the other. It all comes down to how you manage them. A missed student loan payment can impact your score as much as maxing out a credit card.
Moreover, as repayment programs change and interest rates fluctuate, maintaining the right balance between these two debt types becomes increasingly important.
For young borrowers, knowledge is power. Understanding how repayment plans affect your credit, how loan consolidation might reset your credit history, and how applying for a new
credit card could either help or hinder your financial progress are crucial pieces of the puzzle.
In today’s economy, your credit score affects far more than just loan approvals. Renting an apartment, securing a job, and even setting up utilities can depend on it. For students or recent graduates dealing with installment and revolving debts, newer tools like student loan credit cards are emerging to combine repayment with credit building. But like any financial tool, they must be used strategically.
Ultimately, the key is not choosing one type of debt over another, but learning how to manage both responsibly. That’s how you build a strong, healthy credit profile that supports your goals, not one that holds you back.
