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Student Loans and Credit Scores

When discussing family accounts as a way to build credit, it was mentioned that people starting out will generally have student loans as their first credit account, unless they get a car loan or credit cards tied to a member of the family. family with credit history. Student loans are a tricky area of ​​installment credit history because they are not viewed as favorably as you might think.

You might think that opening student loan accounts when you first went to college would show an account history, but in reality, only when you start making your first payment will student loans count as “credit payment history. “. Most student loans have deferred status while you are in college. After you finish school, you have one to four months before companies start asking you to make monthly payments that reduce principal and interest.

However, when you have student loans, you have an “amount owed.” This amount owed can actually lower your credit score. On the one hand, you feel that making payments should raise your scores, but then you get hit for having a large amount owed.

So what can you reasonably do about student loan debt? Do you want to pay it immediately?

According to the likes of Stephen Snyder and Robert Kiyosaki, if you have student loan debt, you should leave it as the last items you pay off. It all comes down to an IRS strategy. The history of this strategy has been around since student loans became necessary for people to go to college. It was when the IRS allowed you to use the interest on your paid student loan as a deduction that this strategy emerged.

How does it work

  • Every month you make a payment, you pay interest and a little towards your principal, when you are paying back into the account.

  • When you file your taxes, you will be asked to enter the amount you paid for student loan interest.

  • The amount paid is a deduction.

  • During this same period, you are paying a small portion of the “amount owed,” thus reducing the total amount of your debt.

  • You are also making payments, and as long as they are on time and in full monthly amount, you are improving your scores.

  • When you reach a point in the loan where you are barely paying the interest on the balance, pay off the debt.

Summary

Student loans, when you start to get them, show up on your credit report, but with no payment history. It is only an open installment account. Lack of payment history does not help or hurt your score. The debt utilization ratio, on the other hand, will affect your score a bit. It is because you have this debt that makes your score slightly lower than if you had no debt.

If this is the only debt you have, then it is also considered “little or no debt,” which also doesn’t help when you’re trying to get new loans to build your credit history.

When it comes time to make payments to student loan companies as part of your installment agreement, you must be on time and pay the requested monthly amount. If possible, pay more than the monthly amount.

Paying interest helps reduce the taxes owed. You want this deduction and the payment history. The deduction may be the only thing that can help you get a tax refund. Payment history also helps you increase your score, as your balance decreases.

There will come a point where you will pay the debt in full. Do this when your tax deduction is no longer significant. Debt reduction will also help at this point. The reason behind this key point lies in the other credit you have built. You must be between 30 and 40 years old, with a mortgage, credit cards, and other types of credit that more significantly influence your ability to obtain credit. You no longer need your student loan payment history. In fact, given the amount of debt you may have right now, you want to lower the “amount you owe” overall.

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