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
13 Brilliant Bulk-Buy Items on Amazon
13 Brilliant Bulk-Buy Items on Amazon

Every household should have these products on hand. Buying them in bulk on Amazon saves you cash.

This Is the Best Used Car You Can Buy
This Is the Best Used Car You Can Buy

This car combines reliability, safety and long-lasting value.

12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t
12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t

Thinking of trying to deduct a few of these things on your federal tax return? That could be a costly mistake.

7 Things I Never Buy at Costco
7 Things I Never Buy at Costco

A bulk buy isn’t always the best buy. Here’s where I shop for these items instead of a warehouse club.

9 Affordable Ways to Make Your Home Look Expensive
9 Affordable Ways to Make Your Home Look Expensive

These products from Amazon add elegance to your home without the expense.

View this page without ads

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

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

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.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

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.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

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.