Believe it or not, paying off your student loans completely can actually lower your credit score. Millions of people are in debt with student loans. The government kind of went a little trigger-happy in regards to student loans. Higher education is supposed to be a desirable investment, so the government decided to give just about anybody alone to go to school. They didn’t take the kind of care that a private bank might take when it came to issuing student loans.
The Two Types of Loans
You can bundle up every single type of loan there is into two categories. The first one is a revolving loan. This is the type of loan you get with a credit card. The other one is an installment loan. You’ll see this whenever you get a car payment or a mortgage. Student loans are considered to be installment loans.
Making your payment on time is critical to the health of your FICO score. In fact, 35 percent of your FICO score is determined by your payment history.
How Having Open Loans Can Help You
Equifax, one of the three major credit bureaus, has this to say about open loans and how they can help you. They tell us that every payment you make on time fortifies and increases your overall FICO score. When you pay off a loan, you no longer have that monthly payment increasing your score. However, if you don’t pay off your loan, the effects will be much worse.
It’ll Be Worse If You Don’t Pay off Your Loan
When you default on your loans, it can impact you in a negative manner for years to come. The impact on your credit score will be negligible if you have other types of loans that are open, such as a car payment or a mortgage. A full 10 percent of your FICO score is calculated from your credit mix – this means the types of the credit you have on your credit report. When you pay your loan off, this component will be reduced. When you have other types of loans to supplement it, the effect will hardly be noticeable. However, if this is the only type of loan available on your credit, you can take a pretty big hit.
It won’t be nearly as bad as if you continually make late payments or if you were to default on your loan. Paying off a loan in good standing will always make credit officers more willing to issue you new loans.