Will my credit score go up if my student loans are forgiven?
The long-awaited student loan debit relief plan was announced in early September, but what impact will it have on your ability to borrow in the future?
President Biden announced his plans for widespread student loan forgiveness back in September, wiping up to $20,000 per person from the balances of millions of borrowers. But questions remain from those that it benefits.
Student loan debt can be a major financial barrier that burdens borrowers for decades, making it harder to purchase a home or start a business. Lenders will want to assess your existing financial obligations before offering any type of credit and hefty student loan repayments can make things tricky.
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Removing a chunk of your student loan debt will improve the situation and will likely have a positive effect on your credit score. However because student loans are ‘installment loans’, meaning that they are set to be repaid over a set period of time with regular payments, they are not weighted very heavily in your overall credit score.
Your credit score will have a credit utilization rate, which is the proportion of your available credit which is currently used to fulfil existing obligations. The utilization rate accounts for up to 30% of your score.
Do student loans have a positive or negative impact on your credit score?
Student loans, like most forms of credit, can have either a positive or negative effect on your credit score. A credit score is a measure of how well you are able to manage your finances and reliably pay back any obligations you have made.
Because student loan debts often run into the six figures it is important to show that you are able to keep up with the regular repayments.
Gregory Poulin, co-founder and CEO of student loan repayment company Goodly, says that student loans can positively affect three of the five factors considered in credit score assessments: payment history; length of history; and credit mix.
So what do those three terms mean? A positive payment history is the most heavily weighted of the five credit score factors, making up 35% of your overall score. Making sure you make payments on time is essential to building a positive score, but there are certain tricks you can use to boost your credit further.
Many lenders offer the option to start repaying your student loan ahead of schedule. You may also be able to begin the process with some small payments during the post-graduation grace period, as little as $25 per month to show a willingness to shift the debt.
Establishing your credit length is also important and accounts for 15% of you FICO score. In most instances college students will have little or no credit history, aside from their student loan. For borrowers with a limited credit history, establishing a credit stream from the age of 18 can have a considerable impact on their credit score.
Lenders also like to see diversity in your borrowing history, to prove that you are able to fulfil a variety of different financial obligations. Your credit mix makes up 10% of your credit score and is one of the easiest to improve quickly.
Showing that you can handle a mix of credit cards, auto loans, mortgages and student loans will make it more likely that the next lender looks upon your request favourable. But only if you managed to fulfil your existing obligations fully.
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