You’ll Be Surprised How Paying Off Your Student Loans Can Affect Your Credit Score

student-loans-credit-score-affect

We’ve covered how student loans affect your credit score on Student Loan Hero before. But recently, I was left with a question: how does paying off my student loans affect my credit score?

I had just gotten a notification from Mint that one of my credit accounts had closed, and there was a slight decrease in my credit score — when in fact, I had paid off one of my student loans. Something that I felt so good about suddenly had me curious about how this happened.

Student Loans and Your Credit Score

Having student loans has positively affected my credit score. Up until two years ago, my student loans were my only source of credit and led to a good score of 720.

But I was a little worried when my credit score went down slightly after I paid off one of my student loans. After I did some research, I found out that paying off your student loans could actually hurt your credit score.

But, why?

Interested in refinancing student loans?

Here are the top 6 lenders of 2018!
LenderRates (APR)Eligible Degrees 
Check out the testimonials and our in-depth reviews!
2.75% - 7.24%Undergrad
& Graduate
Visit SoFi
2.57% - 6.39%Undergrad
& Graduate
Visit Earnest
2.57% - 7.12%Undergrad
& Graduate
Visit CommonBond
2.99% - 6.99%Undergrad
& Graduate
Visit Laurel Road
2.74% - 7.26%Undergrad
& Graduate
Visit Lendkey
2.89% - 8.33%Undergrad
& Graduate
Visit Citizens
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

VIEW ALL

Why Your Credit Score Might Drop

You may be scratching your head wondering why on earth your credit score would go down when you’ve paid off your student loans. Shouldn’t this wonderful occasion be celebrated with a bump in your credit score, and not a hit to it?

It comes down to this: your student loans are considered installment loans, which adds variety to your credit portfolio. Installment loans such as student loans are different from credit cards, which are considered revolving credit.

“If student loans are your only active installment loans, paying them off will change your account mix,” according to Credit.com.

Having a mix of credit accounts can help your credit score. If you don’t have other types of installment loans accounts, such as a mortgage or a car loan, your credit mix will change.

Your credit mix, according to myFICO, accounts for 10 percent of your FICO score.

“This category of your credit score shows how good you are at managing multiple accounts of varying structure at the same time, and without different active accounts, there’s no recent information supporting your ability to do so,” affirms Credit.com.

While 10 percent may not be a lot in the big picture, if you’re like me and don’t have a lot of other credit history and lack a diverse mix of credit, you may see a slight decrease in your credit score, like I did.

So, while paying off your student loans early makes financial sense, it doesn’t directly lead to a better credit score. But that doesn’t mean that you should hold onto student loans for the sake of your credit.

Paying off your student loans can free up your extra money and lower your debt-to-income ratio, which also benefits your financial situation. All in all, paying off your student loans is still a good move.

“Paying off a student loan, like any other loan, is a positive step in building a strong credit history. Doing so demonstrates you are responsible in managing your debts, which is essential to qualifying for new credit accounts,” says Rod Griffin, the Director of Public Education at Experian. (Experian is one of three national credit bureaus and is a leader in the industry)

What Will Happen to My Credit Score?

When I saw that my credit score had a small drop from one loan being paid off, I wondered what would happen to my credit score once all my loans are gone. Should I expect an even steeper drop, or will my credit score remain as is?

Unfortunately, there’s no easy way to project exactly what will happen to your credit score once your student loans are paid off.

“It’s impossible to say if or how much repaying student loans will affect your credit score. It depends on the individual’s unique credit history and the particular scoring model being used,” says Griffin.

As Griffin mentioned, there are many variables that go into calculating your credit score. Your FICO score is comprised of your payment history (35%), amounts owed (30%), new credit (10%), length of credit history (15%), and types of credit in use (10%).

As you can see your payment history accounts for the largest part of your FICO credit score. If you pay off your student loans and no longer have an installment loan in your credit portfolio, but you’ve made on-time payments on your student loans, that will reflect positively on your credit score.

Bottom Line

Paying off your student loans as soon as possible makes a lot of financial sense, but be aware of how it may affect your credit score. You could potentially see a slight drop in your credit score, but probably not a significant one.

The best thing you can do to maintain a positive credit score is to pay your student loans on time. Paying off your student loans will result in some closed credit accounts, but that positive payment history will still be there and show others that you are a responsible borrower.

In order to keep tabs on your credit, it’s a good idea to regularly check your credit report and monitor your credit score. You can get your free credit report at AnnualCreditReport.com. You can also monitor your credit score using services like Credit Karma, Credit Sesame, and Experian.

Interested in refinancing student loans?

Here are the top 6 lenders of 2018!
LenderRates (APR)Eligible Degrees 
Check out the testimonials and our in-depth reviews!
2.75% - 7.24%Undergrad
& Graduate
Visit SoFi
2.57% - 6.39%Undergrad
& Graduate
Visit Earnest
2.57% - 7.12%Undergrad
& Graduate
Visit CommonBond
2.99% - 6.99%Undergrad
& Graduate
Visit Laurel Road
2.74% - 7.26%Undergrad
& Graduate
Visit Lendkey
2.89% - 8.33%Undergrad
& Graduate
Visit Citizens
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.