3 Ways Education Can Impact Your Creditworthiness

Many factors can impact your credit score, but is education one of them?

In short, no. Education does not directly affect your credit score. Whether you have a Ph.D or are a high school dropout, credit reporting agencies couldn’t care less. No matter your level of education, your credit score will remain unaffected.

On the flip side, your credit score is directly affected by factors that may relate to you if you used student loans to fund your education. And your credit score is just one factor that constitutes your creditworthiness. What do we mean by creditworthiness? As defined by Investopedia, creditworthiness is “a valuation performed by lenders that determines the possibility a borrower may default on his or her debt obligations. It considers factors such as repayment history and credit score.”

While your level of education may not directly affect your credit score, it can affect your creditworthiness. Here’s how.

Debt-to-income ratio

If you borrowed money to finance your education, you could have a higher debt-to-income ratio. A high debt-to-income ratio means that you owe a high percentage of your income to debt. This can affect your creditworthiness.

Student loan borrowers owe a significant chunk of change to their student loan lenders. It can be difficult to put a serious dent in these loans, especially while working an entry-level, likely lower-paying job as a recent college graduate.

As your income increases, lenders face less concern over the amount of debt you carry. That’s because as your earning power goes up, you are less likely to miss debt payments. (See also: The 7 Debt Payoffs That Boost Your Credit Score the Most)

On-time payments

Failing to pay a student loan bill fully and on-time can drastically affect your creditworthiness.

Lenders don’t want to credit money to borrowers with a bad repayment history. Any lender wants to know that they will be repaid, on time and on their terms.

On the other hand, paying back your student loans on schedule can help to increase your credit score and creditworthiness. Potential lenders viewing your repayment history like to see that you are a reliable borrower. (See also: What Really Happens When You Don’t Pay Your Student Loans)

Work experience

Your past work experience is a big determining factor of your creditworthiness, especially in relation to home loans. When applying for a mortgage, lenders will take a look at the last two years of your work history, among other considerations. They want to know that not only are you willing to pay back owed money, but that you are also financially able to pay it back. This is why a steady job history is important to potential lenders.

While your level of education doesn’t necessarily determine whether you’ll have vast or limited career opportunities, you are more likely to have better career opportunities (and income opportunities) with at least a bachelor’s degree.