Credit

How Student Loans Impact Your Credit

First things first… last year total outstanding student loan debt surpassed credit card debt in the United States.  Those of you with student loans are collectively in over $800 billion of debt.  And unlike credit card debt, most student loan debt will hang out with you until you pay it…or you die.

Two weeks ago I wrote about the number of credit scores we all have.  A reader named Grant commented on my post and asked a variety of questions about how student loans impact your scores and how best to deal with them. His questions and the timing of his questions were excellent so it warranted an entire article.  Further, my contact at Mint pointed out that the students who graduated this past spring are about to start having to pay back their loans, assuming they had a six-month deferment period. So, thanks to Grant for submitting the following questions…

Q)  Can paying off student loans early hurt your credit score due to the length of the loan?

A)  No, this is a common credit scoring myth.  Paying off your loans early doesn’t have any impact on the age or “length” of the loan.  A loan opened 3 years ago is still 3 years ago regardless of whether or not it’s paid off, paid off early, or still unpaid.

Q)  Can paying student loans early hurt your credit score since banks want the full amount of interest?

A)  No, the “banks” don’t control your credit scores like that so they can’t harm your score because they’re not getting the full amount of interest.  Further, the amount of interest you pay (or don’t pay) is not reported to the credit bureaus so it’s systemically impossible for it to have any influence on your credit scores.

Q)  Can paying off your student loans early hurt your scores because of the decrease in the average age of accounts?

A)  No.  The answer to this question is essentially the same as the first one.  The average age of your accounts, which is important to your scores, takes into account open and closed accounts equally.  As such, paying any loan off early (and then closing the account if it’s a credit card) has no negative influence on the average age of your accounts or your credit scores.

Q)  Can student loans be reported in “triplicate”, so one loan looks like three loans?

A)  This is a possibility.  Student loans are often reported on a disbursement by disbursement basis.  So, if you’re in school for four years and you get one student loan per year or per quarter or per semester…each of those disbursements of funds can be reported as a unique loan on your credit reports.  So, if you have 8 loans over four years…yes it can show up 8 times on your credit reports.

Q)  Does consolidating student loans help your scores?

A) It certainly can.  If you can eliminate multiple accounts on your credit reports and replace them with only one loan, albeit for the full aggregate amount, then you’ll likely improve your scores because you’ve eliminated several accounts with a balance.

Q)  Does it make sense to pay off the smaller loans faster to reduce the number of loans?

A)  Most certainly.  If you’ve got small loans and larger loans and you can knock out the smaller loans without compromising things like savings and emergency funds then go for it.  It will eliminate accounts that have balances, which is always a good thing for your credit scores.

NOTE: The strategy to increase your scores by eliminating accounts with balances will work if you can pay off small credit card balances as well.  Some people use multiple retail store cards and run up small nuisance balances because they think they have to use the store’s card instead of a general use credit card for all of your purcahses.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.