Credit Score Basics > Do student loans affect your credit score in the UK?

Do student loans affect your credit score in the UK?

If you're wondering if taking out a student loan will affect your credit score, the short answer is no—in the UK, student loans have no effect on credit scores.

This doesn't mean student loans don't impact your future financial situation. In fact, they might be considered when you apply for other kinds of loans.

Here’s how it works.

What is my credit score?

Your credit score is a number that shows how reliable you are as a borrower. It's calculated by three companies called credit reference agencies: Experian, Equifax, and TransUnion.

To calculate your score, they use something called a "credit report", which is compiled based on information from banks, credit card providers, public registers, and so on.

Banks and other lenders use your credit report and score to decide whether to offer you credit.

Does a student loan show on my credit report?

No. Your student loan doesn't appear on your credit report, so it doesn't impact your credit score.

However, student loans do show up when the lender runs an affordability check. That's because paying off a student loan each month reduces your disposable income.

This is most common for large loans like mortgages. Mortgage lenders, for example, consider your student loan amount when deciding how much to lend you.

This doesn't mean that having a student loan will stop you from getting a mortgage, but it might limit how much you can borrow.

Why don't student loans appear on my credit report?

It might sound confusing – the average student loan at graduation is £45,000. How can it not show on your credit report, which lists all your other loans, even overdrafts?

The answer is that UK student loans are a form of "income-share agreement".

Here's how student loans work in the UK:

• After graduation, you only start the repayments after earning more than £524 a week (before tax).
• You pay 9% of whatever you earn over that amount. So if you earn £3,000 a month, you'll pay 9% of £672 (above the threshold), which is £60 a month.
• If you're an employee, payments are taken from your salary, just like your tax. Your employer does it all automatically.
• If you're self-employed, you must pay it through your personal Self-assessment tax return.

In other words, if you're employed, you can't avoid paying your student loans off. And default is impossible since if you can't afford to pay, you won't be asked to do it anyway.

There is an exception: if you become self-employed, you must complete the student repayment section of your Self Assessment tax return. This is because the government can't take the student loan repayments out of your salary.

In this case, if you can afford to repay your student loans but don't, you may end up receiving a county court judgment (CCJ), which will show up on your credit report and affect your credit score. According to Experian, a CCJ can cost you as much as 350 points out of 1000.

Can student loans help me build my credit history?

Since student loans don't show up on your credit report, they won't help you build a credit history either.

But it's important to keep in mind that to banks and lenders, no credit history is as bad as a bad credit history. Eventually, you'll want to show you can borrow and repay money on time.

Of course, as a student, you'll have a "thin" credit file and limited opportunities to build credit.

Still, here are some tips to build your credit history as a student:

• Register to vote. You should also re-register whenever you change address (for example, if you switch dorms). This makes verifying your identity easier for banks and credit reference agencies.
• Only use arranged overdrafts. Many student bank accounts come with arranged overdrafts, which are safe to use. However, if you go over the limit, the bank might penalise you. An unarranged overdraft also shows up (negatively) on your credit report.
• Avoid BNPL (buy now, pay later). While using Klarna to pay for your shopping haul is tempting, missing just one payment can damage your credit score before you even get a chance to build one.
• Download a credit-building app like Wollit. Wollit reports your monthly subscription (starting at £9.99) as a loan repayment to all three credit agencies, helping you build your credit history in a safe, affordable, and easy way.

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