How Paying Off Student Loans Can Lower Your Credit Score

Are you among the millions of Americans saddled with student loan debt? If so, you’re probably yearning for the day when you submit the final payment and throw off the shackles of that obligation.

While getting out from under student loan debt provides financial relief, there’s a downside to consider: Paying off the balances can damage your credit score.

This might seem counterintuitive. After all, financial experts on every corner, including ours, encourage you to get ruthless about paying off your debt — and this is solid advice. But you should be aware of the potentially negative consequences so you won’t be taken aback if your credit score dips shortly after you make the final payment.

How student loans help

There are basically two types of loans: revolving loans (think credit cards) and installment loans, which include car loans, home mortgages and student loans. Loans of both kinds are reported to credit bureaus, and payment activity is reported monthly. Because 35 percent of your FICO score is determined by payment history, making timely payments is paramount. But once loans are paid off, the benefit of ongoing payments is slightly diminished. Says Equifax:

If you’re making your monthly payments on your installment loans on time and in full, then each month you’re fortifying a healthy credit score. An open account paid regularly is more beneficial to your credit score than a closed account, which is what your installment loan becomes once it’s paid off.

Does that mean I shouldn’t pay off my loans?

Absolutely not. You should most definitely pay off your loans. The hit to your credit score from paying off your student loans will be small. The additional cost of not doing so, in terms of both stress and additional interest, can be big.

In addition, should you ever accidentally forget a payment, pay late, or the worst scenario, default, the negative affect on your credit history could damage your score for years. So if you’ve got the resources to retire your student loan, or any other debt, you’re nearly always better off doing so.

The power of the installment loan

Credit mix, meaning the types of credit you have, makes up 10 percent of your credit score. So having a mix of both installment and revolving credit can help your overall FICO score. When you pay your student loan off, this component will obviously decrease. But if you have other installment loans, like for a car or house, the effect will be negligible.In short, the ideal credit mix includes both installment and revolving loans, but it’s rarely in your best interests to take on new debt, or continue paying interest on existing ones unless you don’t have a choice. If you can pay them off, do it.

How paying off student loans helps

There are benefits to paying off your student loans. For one, it lowers your debt-to-income ratio, which makes you a more attractive borrower when it comes to loans such as mortgages.

The length of your credit history makes up 15 percent of your credit score. But if you’re concerned that paying student loans off early will hurt you by shortening their credit history, don’t be. The average age of accounts isn’t affected by repayment status. Mint.com notes:

Paying off your loans early doesn’t have any impact on the age or “length” of the loan. A loan opened three years ago is still three years ago regardless of whether or not it’s paid off, paid off early, or still unpaid.

When you begin the process of targeting your loans for payoff, be sure to tackle the ones with the highest interest rates, first. The Project on Student Debt suggests: “[start] with your private loans, since they almost always have higher interest rates and lack the flexible repayment options and other protections of federal loans.”

Bottom line: the benefits of paying off student loans far outweigh any costs. But you must make timely payments to boost your credit, which is important if you’ll need financing to make a big-ticket purchase in the near future. However, early pay off doesn’t necessarily help your credit; your efforts could actually backfire if your repayment strategy is not properly executed.

Struggling with student loan debt and don’t know where to turn for assistance? Take a look at “13 Ways to Pay Off Student Loans Faster.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Hobbies That Help You Live Longer
7 Hobbies That Help You Live Longer

Research shows some hobbies can add years — or even decades — to your life.

The Best and Worst States for Raising a Family in 2021
The Best and Worst States for Raising a Family in 2021

These states have big advantages or disadvantages when it comes to choosing a home for your family.

This Chase Card Is Great for Groceries and Cash Back on Everything
This Chase Card Is Great for Groceries and Cash Back on Everything

You could earn more than $600 cash back in your first year just from grocery shopping.

These 5 Laptops Have the Best Battery Life
These 5 Laptops Have the Best Battery Life

Need a laptop that runs as long as you do? Check out these models.

7 Steps to Keep Your Car Looking Like New
7 Steps to Keep Your Car Looking Like New

Take a few steps to preserve the beauty of your car, and you stand to get a lot more money at trade-in time.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

36 Things That Will Be Obsolete Soon
36 Things That Will Be Obsolete Soon

The writing is on the wall for dozens of things we have grown up with.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

8 Federal Income Tax Breaks for Homeowners
8 Federal Income Tax Breaks for Homeowners

Some of these deductions and credits are available to a wide swath of homeowners.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

10 Types of Retirement Income That Are Not Taxable
10 Types of Retirement Income That Are Not Taxable

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.