How to Pay Off Student Loans Without Hurting Your Credit Score

Many people believe that paying off student loans is good for one’s credit score. Of course, paying down debt demonstrates great financial responsibility and shows that you can be trusted to borrow more money in the future. In addition, being free from student loans means that you do not have outstanding financial obligations that could limit you from paying off other loans.

However, the geniuses at the credit bureaus have strange rubrics for assessing one’s credit. These algorithms do not necessarily take your full financial situation into account. Rather, they rely on your borrowing history, number of open accounts, account inquiries, late payments, and a number of different considerations. As a result, paying off all of your student loans could actually hurt your credit score if you do not have a repayment strategy in mind.

My personal experience is instructive on this point. I was absolutely driven to pay off my student loans from the moment I received my first paycheck after graduating from law school. I did not care about much else other than being debt-free, and I did not consider how paying off my student loans could affect my credit score. During my student debt repayment saga, my credit score went up considerably. Since my student loan accounts were opened at the beginning of my adult life, and my debt was being repaid without any issues, I was rewarded with a high credit score.

The last student loan I paid off was also the oldest account of any kind on my credit report. I paid this student loan off last, since the interest rate on this debt was only 3.25 percent, which was far lower than other loans I had. Also, the debt was only around $9,000, which was nothing compared to the $197,890.20 I paid off in total. Eventually, after paying off all of my other student loans, I decided to finally retire this debt. After paying off this student loan, I was completely debt-free, and although it was awesome to no longer have any student loans, paying off this debt negatively affected my credit score.

A few weeks after paying off my last student loan, I checked my credit report to see if my debt repayment had been reported to the credit agencies. I was shocked to learn that as a result of paying off my last student loan, my credit score went down more than 90 points! There were many reasons why my credit score took a dip after I paid off my student loans. For one, dozens of credit accounts that were related to my student debt were closed after I paid off these loans. As a result, I no longer had a comprehensive credit history from which to base my credit score. Also, my student loans were my oldest credit accounts, so they were very important in calculating my credit score. In addition, I only had one credit card when I paid off my student loans, so when I paid off this debt, I did not have too many remaining credit accounts upon which to base my credit score.

There are a few strategies you can implement to ensure that paying off your student loans does not negatively affect your credit. For one, you can always keep a few small student loans, and just pay the minimum amounts due on this debt. Of course, this only works if the interest on this debt is low, and the total amount of the debt is small enough that it will not affect your ability to borrow money for a mortgage, a car loan, or something else. Ideally, you should keep your older student loans active, since this will ensure you have a more established credit history. Following this strategy will guarantee that you have open accounts on your credit report even while you pay off student loans.

In addition, you can hedge against the effect of paying off student loans by having credit cards or other types of credit accounts. During the majority of my student debt repayment saga, I did not have a single credit card. Although many people encouraged me to apply for credit cards, I did not want to be tempted to spend money I did not have. I have seen people in my own life struggle with credit card debt, and I wanted to avoid this fate for myself. However, if you are responsible, credit cards can be a great way to build credit and maintain solid credit accounts on your credit report. In addition, credit cards also offer an array of rewards that provide a number of benefits to cardholders. In any case, if you have several credit cards, paying off your student loans should not impact your credit score as harshly as it did to me, and I would advise everyone to have multiple credit cards while paying off student debt.

In the end, if you are like me, you are probably not thinking about your credit score while you are paying off your student loans. Indeed, you might believe that paying off student loans can actually boost your credit score, since this shows that you are responsible with money. Ironically, paying down student debt can actually hurt your credit score, because eliminating student loans causes you to have less current accounts on your credit report. However, with some strategies in mind, you can ensure that your will not negatively affect your credit score while paying off student loans.