What happens to your credit score when your student loan debt is forgiven? Here’s what you should know

0

With more than one in five families holding student loans — according to the latest Federal Reserve figures — a proposal by President Joe Biden’s administration to cancel some college debt could help many people’s finances. And while removing debt from your balance sheet can be a good thing for you and your monthly budget in the long run, it can have unexpected effects on your credit score in the short term.

While running for office in 2020, President Joe Biden has pledged to cancel at least some of the student loan debt. So far, his government has taken some of the debt Public service workers People with total and permanent disabilities, former students of the Corinthian Colleges and students of the Marinello Schools of Beauty. However, the administration has yet to release details of debt relief for the estimated 11.8 million government student loan borrowers who may be eligible for relief.

Here’s what we know about how canceling your student loan debt can affect your credit score. More about this here What to do when inflation weighs on your budget? and nine Avoid credit card errors.

What is the difference between a credit report and a credit score?

credit bureaus – Equifax, Experian and TransUnion are the big three – collecting financial information from your creditors to create it credit reports.

Credit bureaus can use these reports to create credit scores that purport to reflect your creditworthiness — and help companies decide, for example, whether to lend you money and what interest you charge. Banks can use their own rating systems to determine whether they will offer you a mortgage or car loan.

Credit scores — including the widely used FICO score — can be calculated using information on your credit report:

  • payment Story, Details of how and when you paid your accounts over the life of your loan
  • Amounts you owe in your accountsincluding how much of your Available Balance you use
  • Length of your credit historyincluding the age of your oldest and newest accounts and the average age of all your accounts
  • credit mixincluding credit cards, personal accounts, installment loans, and mortgages
  • new credit They recently opened

Continue here what goes into determining credit scores.

Could canceling my student loan debt affect my credit score?

For many student loan borrowers, creditworthiness isn’t dramatically affected, Martin Lynch, director of education at Cambridge Credit Counseling, told CNET.

Borrowers who have made payments on time and for whom debt relief covers the full amount of their loans may see a slight increase in their score, Lynch said.

On the other hand, if a loan was in default when it was called, creditworthiness could decline on older FICO models that are still in use. Lynch said the latest FICO scoring models ignore a paid collection account, so a score wouldn’t suffer under the newer calculation method.

Lynch said borrowers with what he calls “thin credit profiles” — those with few credit accounts and not much diversity in the mix of loans they carry — could see their scores drop. And if a borrower lacks other installment loans, getting rid of the student loan (a type of installment loan) could negatively impact their score, he said.

Borrowers could also lose credit score points if student loans are among their oldest accounts, Lynch said, because removing them would change the average age of all of their credit accounts.

So if it could temporarily hurt my credit score, should I skip student loan forgiveness?

no Focusing on the negative impact on scores is a bit off the mark, Lynch said. “For most student loan holders, having thousands of dollars of debt forgiven will be more important.”

With the economy looks shaky, Money saved from waived student loan payments can be used for other uses—like building savings. And if you see a drop in your score, Lynch says you could also use some of the money you’ve saved from debt relief to improve your score by expanding your credit profile or paying off balances on your revolving accounts like credit cards.

More information can be found here The best budget apps and What you should know about inflation.

Share.

Comments are closed.