Student loans are often the first thing that appears on a person’s credit history. Despite having to make installment payments, these type of loans usually do not hold the same value as credit card, vehicle, or other loans when it comes to establishing credit. However, the amount owed on your student loan does have an impact on your credit score – and since student loans are often tens of thousands of dollars, the effects can be devastating. Your loan can help you build credit, but there are a few things you should know.
Some people assume it is a good idea to pay off their student loan in full as soon as they can. Granted, this can ease your ongoing financial burden and ultimately boost your score, but there are a few negatives to consider. First, you will lose the interest deduction on your taxes if the loan is paid off. Taking a few years to pay it off gives you tax deductions. Also, if you have high interest rate debt (ie. credit cards) it would be wise to pay those down first since this can save you hundreds if not thousands of dollars since the student loan debt usually carries much lower interest rates. It might be better to wait until the majority of your student loan payments are going toward principal to pay off the loan in its entirety.
Second, you actually do improve your score with the debt in place. Gradually, as you make payments on time each month, your score improves. If lenders see you consistently repaying your student loan and not carrying high interest credit card debt and large balances on your credit cards, they will consider you a good risk. It’s the pattern of repayment they are looking at that shows you are responsible borrower, as opposed to your ability to pay off the student loan in one lump sum.
Once you have established credit and a repayment history that includes your student loan, as well as credit cards and possibly a mortgage and a vehicle loan, your student loan is no longer of value to you and you should pay it in full, if possible.
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