Paying off your student loans is a major milestone!
You’ll enjoy more cash flow and peace of mind with your college debt behind you, but you may be wondering, “Does paying off student loans help or hurt my credit?”
Your credit scores are key indicators of your credit health and overall financial well-being, so understanding what happens to your credit when you pay off a student loan is important. Here’s what you need to know.
What happens when you’ve paid off your student loans?
After you’ve made your final payment, your student loan debt will be listed as “paid” on your Equifax, Experian, and TransUnion credit reports (which you can access for free on a weekly basis at annualcreditreport.com).
If you made all your student loan payments on time, you’ll enjoy the positive impact on your credit reports for 10 years. But if you missed a payment — or multiple payments — your lender or servicer may have reported it as soon as it was 30 days past due. When this happens, that late payment can remain on your credit reports for seven years, even if you get caught up and pay off your debt completely. Fortunately, it will impact your score less and less with each passing year.
How does paying off your student loans impact your credit?
Several different components make up your credit scores. Credit mix is one of those components, accounting for 10% of your scores. Credit mix refers to having installment loans, like student loans, and revolving credit, like a credit card, on your credit reports. Having a good mix of different types of credit accounts can be good for your credit scores. If student loans were your only form of installment loan, then paying off those loans may cause your credit scores to drop slightly.
That said, the decrease will typically be small, and your scores will likely rebound within a few months. So if your credit scores dipped after paying off a student loan, don’t worry. They’ll usually bounce back as long as you continue to use credit responsibly. The most important thing is that you’ve eliminated a major debt and can move onto other financial goals that are important to you, such as:
- Buying a house: Your lender will look at your debt-to-income ratio, your total monthly debt payments divided by your monthly income, when you apply for a mortgage. When you pay off debt like student loans, your debt-to-income ratio decreases, and the amount you can borrow for a home increases.
- Investing more for retirement: A basic rule of thumb is to put between 10% and 15% of your income toward retirement, but this can be difficult to accomplish with student loan payments. When you pay off your loans, you can put that money into your retirement accounts.
- Paying off other loans: If you have other loans, you can apply your previous student loan payment amount toward your other debt. This will allow you to repay that debt faster, ultimately costing you less interest in the long run.
And if you’re feeling disheartened about a slight, short-term dip in your credit scores, remember that paying off your student loans — or any loans for that matter — will generally have a positive impact on your credit score in the long run. When prospective lenders view your credit report and see that you paid your debts, it can improve your chances of qualifying for credit.
What do you do if your credit scores drop after paying off student loans?
You can take a few actions to improve your credit scores if they took a small hit when you repaid your student loans. If you have the financial flexibility, make a few purchases using a credit card each month, and be sure to pay the entire balance back on time. Similarly, if you have another line of credit, like a car or mortgage loan, be sure to make your scheduled monthly payments. Your payment history accounts for 35% of your credit scores, so maintaining those payments could help you improve your credit.
Final Considerations
Paying off your student loans may result in a temporary dip in your credit score. In the long run, though, it’s good for your credit history and your financial and mental well-being. If your financial situation allows, consider working toward paying off your student loans early. Even if you can knock a few months off your repayment plan, it can save you a little time and money and give you a head start on other important financial goals.
Refinancing to a lower-rate loan is one option for accelerating the repayment process. ELFI offers student loan refinancing with rates comparable to other lenders in the industry, with no application fees and prepayment penalties. If you refinance with ELFI, you’ll receive a personal student loan advisor who will guide you through the whole process from start to finish. Try our student loan refinancing calculator to see how much you could save!
