Does Paying Off Student Loans Help or Hurt Your Credit Score?December 30, 2020
Paying off student loans is a major milestone for anyone. But while you’ll enjoy more cash flow and peace of mind with your college debt behind you, you may be wondering, “Does paying off student loans help build credit?”
Your credit score is a key indicator of your credit health and overall financial well-being, so understanding what happens when you pay off a student loan may be on your mind. Here’s what you need to know.
What Happens When You Pay Off Student Loans?
Paying off your student loans is an exciting accomplishment. After you make your final payment, your student loan debt will be listed as “paid” on your credit report.
If you made all your payments on time, you’ll enjoy the positive impact on your credit report for 10 years. However, if you missed a payment on your student loans, the lender or servicer may have reported it as soon as it was 30 days past due. If this happens, that late payment will remain on your credit reports for seven years, even if you get caught up and pay off your debt completely.
Does Paying Off Student Loans Help Build Credit?
Paying off your student loans — or really any loans for that matter — will often have a positive impact on your credit score in the long run.
When prospective lenders view your credit report and see that you paid your debts, it can improve your chances of qualifying for credit. What’s more, the positive account will remain on your credit report for 10 years. That’s a great way to show a long history of good credit habits.
Why Can Paying Off Student Loans Early Hurt Your Credit Score?
It doesn’t matter whether you pay off your student loans on time or early. The impact on your credit score is the same. You may, however, see a dip in your credit score shortly after you pay off your loans. This can occur if you have credit cards with high balances or you don’t have any other open installment loans. Having a good mix of different types of credit accounts can be good for your score.
However, the decrease will typically be small, and your score will likely rebound within a few months. So if you see your credit score dropped after paying off a student loan, don’t worry. It’ll usually bounce back as long as you continue to use credit responsibly.
The most important thing is that you’ve eliminated a major debt and can move onto other financial goals that are important to you.
What To Do If Your Credit Score Dropped After Paying Off Student Loans
If your credit score took a small hit after you paid off your student loans, you can take a few actions to improve it. If you have the financial flexibility, use a credit card for a few purchases each month, and be sure to pay the entire balance back on time.
Similarly, if you have another line of credit, like a car or mortgage loan, be sure to make your scheduled monthly payments. On-time payments are the most important factor in determining your credit score, and maintaining those payments can have a significant positive impact.
How Does Paying Off Defaulted Student Loans Affect Your Credit Score?
Paying off defaulted student loans is a great financial move, although you won’t see any credit benefits right away. Defaulted student loans remain on your credit report for six years, whether they’re paid off or not, but paying down your balance can help you avoid the unsavory consequences of leaving a student loan unpaid.
If you haven’t made payments on your defaulted student loan after six years, your creditor can issue a County Court Judgement (CCJ). Having a CCJ on your credit report could create additional barriers to receiving future loans. It could even impact things like your housing and job searches. CCJs remain on your credit report for six years, as well, so it’s important to avoid them whenever possible.
Benefits of Paying Off Student Loans
Even with a temporary dip in your credit score, paying off your student debt can have a huge impact on your financial situation. The average student loan payment for recent graduates is $393, according to financial marketplace Credible.
With this extra cash every month, you can work toward other financial accomplishments. You can build an emergency fund, save for future goals, or simply spend it as you wish.
Having the burden of your student debt off your back can also have a positive impact on your mental health. According to the Marketplace-Edison Research Economic Anxiety Index, people with student loans score about two-thirds higher than people without student debt.
The Bottom Line
Paying off your student loans may result in a temporary dip in your credit score. In the long run, though, it’s good for your credit history and your financial and mental well-being.
If your financial situation allows for it, consider working toward paying off your student loans early. Even if you can knock a few months off your repayment plan, it can save you a little time and money and give you a head start on other important financial goals.