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I have high debt, but 75% is student loans. Do lenders view that debt as negatively as credit-card debt?
Yes and no. "Student loan debt is given a more favorable look when calculating credit scores but is equal in terms of debt-to-income ratios," says Bob Walters, chief credit officer of Quicken Loans.
The FICO score, the credit score many lenders use, divides loans into two categories: installment loans and revolving loans. Student loans, mortgages and car loans -- where you pay a fixed amount every month -- are installment loans. Credit cards -- where you control your monthly payment -- are revolving loans.
Owing a lot of money in student loans -- or any installment loans -- isn't going to hurt you as much as maxing out your credit cards, says Craig Watts, consumer affairs manager for Fair Isaac, which created the FICO score.
But you still can hurt your credit score if you miss payments on your student loans. On the other hand, you can improve your score by making payments on time. If you do have a good student-loan payment record, Watts recommends checking your credit report to make sure the student loan information is being reported. "For a lot of recent graduates, their student loan and one credit card will be their whole credit history," says Watts. For more information about improving your credit score, see MyFico.com.
In addition to your credit score, however, lenders also look at your ability to repay a loan. "This is based strictly on your monthly income and the number of monthly payments you are obligated to repay," says Walters. For example, you might find it difficult to qualify for a mortgage if your new monthly mortgage payment and all of your other monthly payments together represent more than 50% of your gross monthly income, Walters says.
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