Student loans are my only installment loan. Is paying them off a problem?
Making good on your student loans will help your credit far more than it will hurt.
Students embrace as they arrive for the Rutgers graduation ceremonies in Piscataway, NJ.
Mel Evans/AP/File
Congratulations, your听听were your only听,听and you鈥檙e about to pay them off.听You may be wondering from a听听standpoint: Is this听a problem?
Not really. Here鈥檚 why.
The five factors
听has five major elements:
- Your听history of paying on time.
- How much of your available credit you鈥檙e using.
- How long you鈥檝e had credit.
- Whether you鈥檝e applied for new credit lately.
- The types of credit听you use.
The biggest of the five
If you鈥檝e made good on your student loans, and especially if you had no delinquencies, your efforts have听helped your score a lot in听that first category. Paying on time is the biggest single factor in determining your score from听, which is the one used in most lending decisions, or from听, FICO鈥檚 competitor.
鈥淟ength of credit history鈥� will look great, too. Student loans tend to take many years to pay off, so you have built a pretty solid credit history with this installment loan.
Good news
You may worry that removing 鈥渋nstallment loan鈥� from your 鈥渢ypes of credit used鈥� will听hurt your score. Actually, the听information about your paid-off installment loan can听stay on your credit report for up to 10听years. That鈥檚 a good thing, provided the information shows good credit behavior. Creditors will love that you paid your student loans听off on time and in full.
If it听was your only installment loan, you could lose 鈥渁 few points鈥� on your credit score, says credit expert Barry Paperno, who blogs at听. The 鈥渢ypes of credit used鈥� category works to your best advantage if you have at least one open installment loan and one revolving (credit card) account, he says.
What to do with the extra cash?
There鈥檚 an added wrinkle that will help your credit score, provided you keep up your responsible behavior.听You obviously were budgeting wisely, because you听put aside a certain amount each month to pay the student loans. Now those payments have ended, which frees up that cash. What should you do with it?
Perhaps you want to save it for retirement or a child鈥檚 college fund. Those are听great choices. But if you have existing credit card debt, think about paying it听off听first. Rather than carrying a balance, we recommend paying credit card bills in full and on time, every time. It helps you build credit by reducing your credit utilization, and it saves you money on interest.
You may also wonder听if it鈥檚 time to replace that installment loan with another. That would听likely help your credit score if it restores a second kind of credit to your mix. If you are thinking about getting a听听that you鈥檒l have to finance, you could use the freed-up cash toward that听purchase.
This article first appeared in 听
Updated Aug. 16, 2016.听