What’s the rush? Why paying off this debt might actually HURT your credit score.
If you are like 44 million Americans nationwide, you probably owe a share of the national $1.5 trillion student loan debt. In 2016, the average graduating student owed $37,172 in student loan debt. For most Americans, student loan debt is the first time they will take out a loan or line of credit, and the first step toward building credit. If you are eager to pay off your student loan debt early, you may want to wait. Closing a student loan account may actually hurt your credit score, because it will shorten the length of your credit history.
Your credit score is made up of five differently-weighted factors: your payment history (35%), total amount owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). Paying off a student loan may impact both the length of your credit history and your credit mix. The length of your credit history is determined by the age of your oldest account and your credit mix is made up of revolving debt like credit cards and nonrevolving debt like student loans and car payments. Randall Yates, the founder and CEO of the Lenders Network explains, “your credit score may take a hit when you pay off an account because it lowers the average age of your accounts. This is especially true if the student loan was one of your older accounts. If it was, you could see a drop of 10 to 15 points.”
As long as you manage your debt responsibly, a closed student loan account will not negatively impact your credit score for long, and the drop will likely be small. NerdWallet contributor Brianna McGurran attested, “having other accounts open, like credit cards, a mortgage, or a car loan, could help buffer the score drop that could occur once your student loans are paid off.”
When you are in the process of applying for mortgage financing, it’s best to avoid major credit moves like opening or closing new accounts. Taking a new line of credit or paying off a debt will cause your score to fluctuate. Lenders are looking for consistency during the mortgage financing process and a major drop in your credit could be red flag. If you have any questions about your student loan debt and how it will influence your ability to qualify for mortgage financing, talk with a financial advisor or loan officer.
Sources: Apartment Therapy, Forbes