Credit Scores, Student Loans, And You — A Must Read Guide
(ReliableNews.org) – People who have attended college more than likely carry their fair share of student loans, with payments that seem to never end. However, for most there will come a time when the loan is paid in full, leaving borrowers to wonder if it will have a positive impact on their credit scores.
Borrowers who make their payments on time every time likely see their credit scores, a number that determines how risky banks see lending money, rise over time. If it’s paid on time, the score goes up, but it will go down if the borrower misses payments or is late. Paying off student loans might seem like it should boost one’s credit score, but it’s not necessarily true.
Student Loans and Credit Scores
Most student loans default to a type consisting of installment payments of the same dollar amount each month over a set period of time. Once a borrower pays off the installment loan, the credit bureau doesn’t have the regular payments to gauge whether or not the person is a good credit risk. In addition, now the line of credit is gone, possibly and temporarily lowering one’s credit score.
Part of the total score depends on the length of time one has had the available credit account. For instance, if the borrower has had a credit card in good standing for 20 years and one in good standing for 2 years, closing the longer one will shorten the credit history and ding the score. The same concept holds for student loans. When paying off the loan, there’s a steady stream of payment history, but once it’s paid off, it’s gone.
How to Pay It Off and Impacts
There are a few options to use to pay off student loans. One can go the installment route, choose an income-based payment plan, or refinance for a better rate. Using an income-based repayment option will have no impact on the credit score unless the borrower misses payments or they’re late. If a person chooses the refinance option, the initial loan approval process can temporarily lower the credit score, but once it’s fully paid, it reflects well on the borrower as they have met their obligation.
Student loan forgiveness could be an option for some, but without regular payments to prove creditworthiness, it’s unlikely the credit score will change or it could dip temporarily.
No matter how students choose to pay off their loans, and the impact it may have on their credit scores in the short term, no longer making payments means they’ll now have funds to dedicate to other things in life. They can use the extra money to invest, pay off other bills, or take a well-deserved vacation. After all, paying off debt is hard work, and a job well done should be celebrated.
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