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Would Paying Off a Portion of My Student Loans Improve My Credit Score?

Student Loan

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By Bruce McClary: 11/22/19

The short answer is no, paying off a portion of your student loan won’t quickly improve your score. And even if you pay it off in full, your score may not get the boost you expect. If your main goal is to increase your score, you have to review your current credit reports to determine what needs to be improved or changed.  

When you consider what goes into your score, the most influential factor is making payments on time, which accounts for 35% of your score. A history of late payments can drastically reduce your score. So, if you pay your student loans on time every month, they are positively contributing to your score over time, building a history of positive payments. This is actually their biggest contribution to your score.   

The second most influential factor is your utilization ratio, which is 30% of your score. Your utilization ratio is how much revolving credit you are using compared to how much credit you have. The lower your utilization ratio, the better your score. It’s recommended that you keep your credit usage at about 30% of your available credit. But this only considers your revolving debt, like your credit cards. Student loans or any other installment loan you have are not included in the calculation. So, reducing the amount you owe on your loan won’t affect your utilization ratio.  

The next most influential factor is the length of your credit history, which influences your score by 15%. The longer you’ve had credit, the better. Younger or shorter credit histories usually come with lower scores that can only be improved over time so taking time to pay off your student loan for a couple of years could allow you to build a history.  

And last but not least, your credit mix and credit inquiries (how often you ask for new credit) influence your score by 10% each. Your credit mix looks at the different types of credit that you have, such as credit cards or installment loans. It is recommended to have a combination of both. Now, if you have a limited variety of each, paying off your student loan could negatively affect your score by reducing the credit mix on your file. 

Generally, you can expect to see your score improve over time if you are consistently mindful of the factors that influence your score. Paying on time, keeping your balances low, and asking for new credit sparingly should help you increase your score. And although paying off your student loan quickly may not give you the credit boost you expect, it is a good idea to become debt free and focus on your other financial goals. 

If you are not sure where to start, get a copy of your credit reports, and review them carefully. You can get a free copy from each of the credit bureaus every 12 months at www.annualcreditreport.com. And if you need additional guidance determining what aspects of your credit report need improvement, contact an NFCC-certified credit counselor. Your counselor will review your credit and overall financial situation and help you establish an action plan that’s right for you. With the right guidance and discipline, boosting your score is just a matter of time. Good luck!

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Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

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Lansing, MI  48909-7720
877-999-6442

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