Can Paying Off Student Loans Help Your Credit Score? Not Always

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Originally published Oct. 16, 2017

We know that falling behind on student loan payments can wreck a credit score. But my circumstances prompted another question — can paying off student loans help credit?

After paying off one of my student loans, I got a notification that there was a slight decrease in my credit score. I’d felt so good about paying off one of my loans in its entirety, but this achievement suddenly felt like a mixed blessing.

It led me to wonder how paying off student loans affects your credit score, whether in a positive or negative way. What I found was that both outcomes are possible.

To explain why, let’s look at the following topics…

Does paying off student loans help your credit score?
Why paying off your student loans early can hurt your credit score
Paying off student loans early is still a good move
What will happen to my credit score?
Bottom line: Timely student loan repayment is key

Does paying off student loans help your credit score?

Believe it or not, my student loans have mostly affected my credit score in a positive way. Up until two years ago, my student loans were my only source of credit. Thanks to on-time, in-full payments (your payment history makes up 35% of your FICO® Score), they led me 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 can impact your credit score, even if only moderately.

But why?

Why paying off your student loans early can hurt your credit score

You may be scratching your head wondering why on earth would your credit score go down when you’ve achieved this difficult financial goal. Shouldn’t paying off your student loans help your credit score rather than hurt it?

It comes down to this: Your student loans are considered installment loans, and these can add variety to the mix of your credit portfolio. Installment loans are different from credit cards, which are considered revolving credit.

Having a mix of accounts can help your credit score. In fact, credit mix accounts for 10% of your FICO Score.

The idea here is that your credit mix proves your ability to manage different types of credit. So if you don’t have other installment loans, such as a mortgage or a car loan, your credit mix will show less variety once your student loans are removed.

While 10% may not be a lot in the big picture, if you don’t have a lot of other credit history or a diverse mix of credit, you may see a slight decrease in your credit score. In other words, although paying off your student loans early makes financial sense, it can sometimes come with a small ding to your credit score.

Paying off student loans early is still a good move

This doesn’t mean you should hold on to student loans for the sake of your credit. Knocking out your student loans can free up your extra money and lower your debt-to-income ratio, which also benefits your financial situation and can make it easier to qualify for another type of loan, such as a mortgage. All in all, retiring your student debt is still a good move.

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

So even if your credit score drops slightly from closing out a student loan account, doing so will still likely benefit you financially in the long run. The only reason to delay would be if you need the strongest credit possible to qualify for a mortgage or similar product.

Another reason is if you have other debt with higher interest rates, such as credit card debt, that you wish to prioritize first. If these reasons don’t apply to you, it’s probably in your best interest to pay off your student loans as fast as you can, even if your credit score will take a temporary dip.

What will happen to my credit score?

When I saw that my credit score had dropped a little from paying off just one loan, I wondered what would happen to my credit score once all my student loans were gone. Should I expect an even steeper drop, or would my credit score remain as is?

Unfortunately, there’s no easy way to project exactly what will happen to your credit score once you’re done paying off your student loans.

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

He noted that there are many variables that go into calculating your credit score. Your FICO Score is comprised of the following:

  • Your payment history (35%)
  • Amounts owed (30%)
  • New credit (10%)
  • Length of credit history (15%)
  • Mix of credit in use (10%)

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

Bottom line: Timely student loan repayment is key

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 — and without your student debt weighing you down, you’ll be able to make other positive financial decisions that could improve it in the long run.

One of the best things 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 lenders that you are a responsible borrower.

Also remember to regularly check your credit report and monitor your credit score. You can get your free credit report from the three major agencies at AnnualCreditReport.com, and can monitor your score using various online services at no cost.

Rebecca Safier and Jamie Cattanach contributed to this report.

Interested in refinancing student loans?

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LenderVariable APREligible Degrees 
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2.25% – 6.28%3Undergrad
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1.89% – 6.77%4Undergrad
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2.39% – 6.01%Undergrad
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Visit Elfi

1.99% – 5.61%5Undergrad
& Graduate

Visit CommonBond

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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of September 9, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.28% APR (with AutoPay). Variable rates from 2.25% APR to 6.28% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective Sep 1, 2020 and may increase after consummation.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. 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 to help you understand what you are buying. Be sure to consult with 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.