What can a credit waiver mean for your credit score?

As President Joe Biden announces his student loan debt relief plan, many borrowers may be wondering how it will affect their credit scores.

Economist and Professor at Florida Gulf Coast University (FGCU). He said that if you are one of the 20 million Americans who need thousands of college debt cancellations, there is an opportunity. An opportunity, if harnessed wisely, can make your credit shine.

“There’s no money in your pocket today, but it’s $10,000 less than what you owe,” said Victor Claar, an economics professor at FGCU.

Claar said the impact of forgiving student loans could be significant to a person’s personal finances.

“For a typical American who’s a college grad, they have debt somewhere near the price of a new car. Somewhere in the mid-$20,000s and low-$30,000s,” Claar said.

The president’s student loan relief plan aims to reduce at least $10,000 of that debt for borrowers earning less than $125,000 a year. According to Measure One, an academic data company, 92 percent of student debt is federal loans.

“A lot of people wonder if it’s appropriate to have a grad bailout,” Claar said.

That’s not the only question, some may be wondering what impact this will have on a borrower’s creditworthiness. Creditrepair.com reports that credit forgiveness can affect your credit score. In fact, it can cause it to fall off for a short time. Because federal student loans are installment loans and your credit score benefits from diversification such as student loans and auto loans, closing this installment loan can result in a temporary drop in credit score.

Claar said that’s also the case if you decide to use the money you’ve saved to close a credit card.

“When you look at your credit history, there are several factors that go into it — how long your history — ironically, if you cancel credit cards that you don’t need, your credit may go down because they’re looking at your history,” Claar said . “For most people, the best thing you can do when it comes to your credit rating is pay your bills on time — especially if you can afford to pay in full every time you come, or come near, this is great for your credit score and lowers the amount of interest you pay.”

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