A missed payment is the No. 1 way to lose points on your credit score.

Thanks to student debt, millennials are one financial emergency away from sinking their credit scores.

Sixty-three percent with student loans saw no improvement to their credit score over a year, while 15 percent had a 40-point drop, says a study from credit scoring company FICO. Only 22 percent had a 40-point increase.

Student loan borrower behavior

FICO VP Ethan Dornhelm calls a 40 point rise or fall in a year a “significant change” in that amount of time. And he puts those with a significant change into two groups: “score increasers” and “score decreasers.”

“What we found when we separated the score increasers from the score decreasers was pretty intuitive,” Dornhelm told Debt.com. “The main characteristics of score increasers was that they were consistently paying their bills as agreed and that they were significantly reducing their amounts owed — they were improving their picture. ”

The “score increasers” paid down 28 percent of their credit card balances, while “score decreasers” increased their balances by 78 percent, going from a $3,000 balance on their credit cards to $5,000 on average, Dornhelm says. Interestingly, “score decreasers” had higher FICO scores than “score increasers” on average. The average FICO score for “score decreasers” was 640, while “score increasers” had FICO scores of 575.

To fully understand why some borrowers’ credit is better than others, Dorhlem says you need to understand what makes up a FICO score.

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How does FICO calculate your score?

There are five key factors that make up your FICO credit score, Dornhelm says. And some factors make up bigger pieces of the pie than others. These are the five and how much they affect your score…

1. Payment history: Whether the borrower historically pays their bills as agreed. If they haven’t, how severely have they missed payments and how recently that occurred. The biggest driver of the borrower’s FICO score. It makes up about 35 percent of the FICO score calculation.

2. Amounts owed: Examining the level of debt that the borrower has. It looks at credit cards and other revolving products separately from student loans, mortgages and all other loans. Also, the utilization ratio, which is the percentage of available credit you’re using. How maxed out are they on their credit card? Higher levels of debt, higher utilization ratios, correspond to higher risks and therefore are generally lower FICO scores. Rolled up together, this makes up 30 percent of the score.

3. Length of credit history: The length of experience the consumer has managing credit. Someone with 20-something years of experience managing credit on their file paying their bills is going to be rewarded slightly compared to someone who has just recently started using credit. This makes up 15 percent of the FICO score calculation.

4. New credit: How often someone applies for credit. Consumers who apply more frequently for credit are often associated with higher risks. Not a huge driver, but it can be significant for new credit users. Makes up 10 percent of a FICO score.

5. Credit mix: Whether you’re managing credit across a variety of different credit products successfully. Managing both loan-type debts as well as credit card debts. The last 10 percent of the score.

Student loan advice

Dornhelm feels that college is a worthwhile investment, but borrowers need to be aware of how much they take out, and know how they’ll pay it back.

“I was in school in the late 90s,” Dornhelm says. “In my 20-something-year long experience, it’s certainly been eye-opening to see how much costs for an education have increased by. I would mainly emphasize to [borrowers] make sure that they have a plan.”

In fact, Dornhelm says having student loan debt isn’t necessarily a bad thing. Having an active loan is a way to start building credit, which is why it’s crucial for college graduates to learn how their credit works at a young age, and plan for their future finances.

“If they can find a way to pay that back in an on-time fashion consistently over a period of months and years, they will be in a position when they reach those life cycle events like wanting to buy a house, a car, or a home,” Dornhelm says. “Their FICO score will be in good shape as long as they’re managing their revolving debts and keeping them relatively low, not spending more than what they have, and paying their bills as agreed.”

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About the Author

Joe Pye

Joe Pye

Joe Pye is the managing editor of Debt.com. In 2016, Pye started writing about debt and personal finance while attending Florida Atlantic University, where he served as Editor-in-Chief of the student-run newspaper, the University Press. Before graduating with a bachelor's degree in multimedia journalism, Pye placed as a finalist for the Mark of Excellence award by the Society of Professional Journalists Region 3 for feature writing and in-depth reporting. In 2021, Pye earned First Place in the Green Eyeshade awards for "Best Blog" for his side-project BrowardBeer.com. Since taking a full-time position here in 2018, Pye has become a certified debt management professional who's applied what he's learned to his personal life by paying down more than $22,000 worth of combined credit card, student loan, auto and tax debt in less than two years.

Published by Debt.com, LLC