With more than one in five families holding student loans – according to the latest numbers by the Federal Reserve – a proposal by President Joe Biden’s administration to cancel some of the higher education 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 workers , former students of Corinthian College and Students of the Marinello Schools of Beauty. However, the administration has yet to release details of the debt relief the estimated 11.8 million borrowers with federal student loans 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 hereand nine .
What is the difference between a credit report and a credit score?
– Equifax, Experian and TransUnion are the big three – collecting financial information from your creditors to create it .
Credit bureaus can use these reports to create credit scores that purport to reflect your creditworthiness — and help companies decide whether to lend you money and what interest rate to charge, for example. 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 in 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
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 advicesaid 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, Money saved from waived student loan payments can be used for other purposes—such as 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 hereand .