How a Parent PLUS Loan Can Affect Your Credit Score

Taking on a Parent PLUS Loan for your child's education is a significant financial step. This loan can influence your credit score throughout its lifecycle, from the initial application to the final payment.

1. The Credit Check: When you apply, the Department of Education runs a hard credit inquiry. This can cause a small, temporary dip in your credit score, which is standard for most loan applications.
2. New Debt Account: Once the loan is approved and disbursed, it appears on your credit report as a new installment loan. This increases your total debt, which can initially lower your score by affecting your credit mix.
3. Payment History: Making consistent, on-time payments is the most critical factor. A strong record of timely payments will positively build your credit history over the life of the loan, demonstrating creditworthiness.
4. Missed or Late Payments: Conversely, failing to make payments on time can have a significant negative impact. Delinquencies are reported to credit bureaus, which can severely damage your credit score and remain on your report for years.

How Much Will a Parent PLUS Loan Affect Your Credit Score?

Several factors determine how a Parent PLUS Loan will impact your credit score. Here are the key aspects to consider before you apply.

• Hard Credit Inquiry: Applying for the loan triggers a hard credit check, which can cause a small, temporary dip in your credit score. This effect typically diminishes within a few months.
• Increased Debt Load: This new loan adds to your overall debt, which can affect your credit utilization and debt-to-income ratio. A higher debt load may lower your score.
• Payment History: Making consistent, on-time payments can help build a positive credit history and improve your score over time. However, late payments will have a significant negative effect.

How You Can Avoid a Parent PLUS Loan Affecting Your Credit Score

Co-sign a Private Student Loan

You might consider co-signing a private loan for your child instead. The loan is in the student's name, making them the primary borrower. While your credit is still linked as a co-signer, this arrangement often provides different repayment terms and interest rate options than federal loans.

Maximize Other Forms of Aid

Encourage your student to exhaust all other financial aid options first, such as scholarships, grants, and work-study programs. Securing this "free money" reduces the total amount that needs to be borrowed, potentially eliminating the need for a loan and protecting your credit score entirely.

Ways to Improve Your Credit Score

Improving your credit score is an important and achievable goal that significantly impacts your overall financial health. With consistent positive behavior, most people can see meaningful changes using several proven methods.

• Make on-time payments. Your payment history is the most significant factor in your credit score, so set up automatic payments or reminders to ensure you never miss a due date.
• Lower your credit utilization. Aim to use less than 30% of your available credit, as high balances can signal risk to lenders. You can achieve this by paying down debt or requesting a credit limit increase on an existing card.
• Monitor your credit reports. Regularly check your reports from Experian, TransUnion, and Equifax for free to catch and dispute any errors or fraudulent activity that could be hurting your score.
• Become an authorized user. Ask someone with a strong credit history to add you to their account. Their responsible credit habits can positively influence your score, provided the issuer reports authorized user activity to the credit bureaus.
• Limit applications for new credit. Each application can result in a hard inquiry, which may temporarily lower your score. Space out your applications and only seek new credit when necessary.

The Bottom Line

A Parent PLUS Loan is a significant debt that appears on your credit report. While timely payments can help build your credit history, missed payments will negatively impact your credit score.

Frequently Asked Questions

Does applying for a Parent PLUS Loan affect my credit score?

Yes, the application triggers a hard credit inquiry, which can temporarily lower your credit score by a few points. This effect is usually minor and short-lived.

How does a Parent PLUS Loan appear on my credit report?

It is listed as an installment loan under your name. Your payment history, loan balance, and account status are all reported to the major credit bureaus.

Can I improve my credit score with a Parent PLUS Loan?

Yes, making consistent, on-time payments demonstrates creditworthiness and can positively impact your credit history, potentially improving your score over the long term.