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In discussing family accounts as a way to build credit, it was mentioned that people starting out will usually have student loans as their first credit account, unless they have a family member with a credit history. Do not obtain car loans or credit cards linked to Student loan installments are a tricky area of credit history because they are not treated as favorably as you would imagine.
You might think that opening a student loan account when you first went to college would show account history, but in fact, only when you start making your first payments count as student loan “credit payment history.” Will go Most student loans are in deferred status for as long as you are in school. Once you’re out of school, you have one to four months before companies ask you to make monthly payments that pay back principal and interest.
Still, when you have student loans, you have “amount owed.” This outstanding amount can actually lower your credit score. On the one hand, you think that making payments should increase your score, but then you run into trouble when you have a large outstanding balance.
So what can you reasonably do about student loan debt? Do you want to pay it off immediately?
According to people like Stephen Snyder and Robert Kiyosaki, if you have student loan debt, you want to leave it as your last payment. It comes down to an IRS strategy. The history of this strategy has existed since student loans became necessary for people to go to college. The minute the IRS allowed you to use student loan interest paid as a deduction was when this strategy came into being.
how it works
- When you’re making new payments into the account, each month you make the payments, you pay interest and a little bit toward your principal.
- When you file taxes, you are asked to enter the amount you paid in student loan interest.
- The amount paid is a deduction.
- During the same period, you are paying down a bit of the “amount owed”, thus reducing your total loan amount.
- You’re also making payments, and as long as they’re on time and the full monthly amount is due, you’re helping your score.
- When you reach a point in the loan where you are making barely any interest payments on the balance, pay off the loan.
Summary
Student loans show up on your credit report when you first start taking them out, but without any payment history. This is just an open installment account. A lack of payment history does not help or hurt your score. On the other hand, debt utilization ratio will hurt your score slightly. It’s because of having the loan that it lowers your score slightly if you had no loan at all.
If this is the only loan you have, it’s also considered “little to no debt,” which also doesn’t help when you’re trying to get new loans. Build your credit history,
When it comes time to make payments to student loan companies as part of your installment agreement, you must be on time and pay the requested monthly amount. Pay more than the monthly amount, if possible.
The interest paid helps reduce your taxes. You want this deduction and payment history. Deductions may be the only thing that helps you get a tax refund. Payment history is also helping you to increase your score, as the balance is reducing.
There will come a time when you are going to pay off the loan in full. Do this when the deduction on your taxes is no longer significant. Reduction in outstanding debt will also help at this point. The reason behind this key point lies in the other credits you have built up. You must be in your 30s or 40s, with a mortgage, credit cards and other credit that is more likely to weigh on your ability to obtain credit. You no longer need payment history from student loans. In fact, given the amount of debt you may have at this point, you want to lower the “amount owed” overall.
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