Will Paying off My Student Loans Affect My Credit Score?

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The growing cost of education has led students toward education loans. An education loan, or a student loan, is one of the most sought-after ways to finance your higher studies in case you do not have the necessary funds to support such expenses.

However, just as beneficial as this credit option is, the fact is that after paying off your student loan, your credit score can fall. The way a student loan affects credit score is temporary and can be reversed over time. 

Read on to know more about how paying off student loans can affect credit scores.

How does paying off a student loan affect your credit score?

A student loan, or any other loan, can directly affect your credit score depending upon the loan amount, repayment period and loan terms. So, the answer to 'do student loans affect credit score?' is a simple yes.

In the case of education loans, they appear on your credit report as instalment loans. These loans have a set loan amount and predetermine a number of monthly repayments, just like an auto loan. Student loans are different from credit cards, which are called revolving credit lines. A revolving credit line signifies that you get a said amount of credit each month, and you can spend up to that amount only. Therefore, your statement value differs each month based on your spending.

Your credit score is impacted by how you manage your credit card bill payments. Keeping a credit card's balance low and making timely payments are the two major factors affecting the credit score.

On the other hand, an instalment loan that you obtain often helps in the credit mix. This category might impact your credit score depending on the scoring model. Know that credit mix showcases your ability to maintain a sound payment history with different types of credit accounts. 

The correlation between a student loan and credit score arrives when you just have one instalment loan in your credit account. As you pay off your student loan, your credit mix falls. This, in turn, lowers your credit score for the short term.

What are the benefits of paying off a student loan on time?

Many graduates tend to carry the burden of student loans with themselves for many years. However, such a habit can hurt you financially. Apart from considering how a student loan debt affects the credit score. You should try to pay off your loan as soon as possible, as it has the following benefits:

Lowers debt-to-income ratio

One of the most significant benefits of paying off your student loan early is it decreases your debt-to-income ratio. Moreover, if you follow this path, you will be able to follow your other financial goals. A lower debt-to-income ratio is also beneficial if you wish to apply for new credit.

Reduces financial stress

Indeed, student loans are a source of great financial stress. It might suck your finances and stop you from achieving your life goals. So, if you want to get rid of financial stress, consider saving enough money to pay off your education loan at the earliest.

Helps in savings

While serving a loan, some part of your monthly income goes towards paying off the student loan. If you repay the amount early, you can create free cash flow for yourself. This will help you save more and achieve your other financial goals.

What are the ways to pay off a student loan faster?

One of the best ways to pay off a student loan is by paying more than the minimum each month. The more you put towards payments, the less interest you will owe. Here are a few strategies that will help you pay off your student loan faster:

Start repaying early

Typically, lenders ask you to start repaying the loan six months after getting a job. However, you can start with the repayments early if you have saved enough money. However, note not to start repaying the amount if you are not sure about your savings. 

Opt for refinancing

Refinancing helps consolidate multiple student loans into a single private loan. This ideally comes at a lower interest rate. However, you will need a good credit score and a decent debt-to-income ratio to go down this route.

Pay biweekly

Most individuals choose to repay a student loan through monthly payments. However, if you repay the amount once every two weeks, you will make extra payments. This could help you save on interest and pay off the amount early.

To conclude, paying off your student loan will not bode well for your credit score, but it will surely be a milestone for you to celebrate. The way a student loan affects credit score can be reversed easily by following a few simple steps. First, however, note that improving your credit score is a rigorous process which requires enough patience and consistency.

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