Does Paying Off Student Loans Help Credit?

You may have noticed that making regular payments on student loans positively affects your credit score…

Like any kind of credit, making regularly scheduled payments boosts your score slightly. The longer you go without missing a payment, the better your score becomes…but is that the only way that student loans affect your credit? Let’s see.

Does Paying Off Student Loans Help Credit?

GraduationThe answer is not a simple “yes” or “no”. How paying off your loans affects your credit depends on a few factors. One of the main factors is Diversity. The diversity of your credit accounts have a direct impact on how paying off credit will affect your score.

A student loan is known as an Installment Loan. If you don’t have any other installment loans, such as a mortgage or car loan, then paying off your student loans may lower your credit score slightly.

That’s not saying that you should keep your student loans for as long as possible. Paying off loans on time shows credit bureaus and lenders that you are a responsible borrower.

Not only that but paying off loans changes your debt-to-income ratio, freeing up cash monthly that you would have been spending on loan payments. It’s a positive impact on your financial situation overall, even if closing that loan account lowers your credit score slightly.

However, there is no way of knowing ahead of time how paying off a loan might affect your score. Each person’s credit situation is different. It really depends on your unique credit history and the scoring model being used.

In general, just continue to make your scheduled payments on time until you completely pay off your loans. If you do see a decrease in your credit score, it probably won’t be a significant one.

To see your credit score for free (that won’t negatively impact your score), I recommend using Credit Karma. It’s the site I use to keep track of my credit portfolio and receive monthly updates to my credit score.

Also, be sure to leave your comments and thoughts on student loans and credit scores below. I love reading what you have to say!