When discussing family accounts as a way to build credit, it was mentioned that people just starting out will usually have student loans as their first credit account, unless they get a car loan or linked credit cards. to a family member with a credit history. Student loans are a tricky area of installment credit history because they aren’t viewed as favorably as you might imagine.
You might think that opening a student loan account when you first went to college would show a history of the account, but in reality, it’s not until you start making your first payment that student loans will be considered a “credit payment history”. Most student loans are deferred while you are in school. Once you’ve left school, you have one to four months before companies start asking you to make monthly payments that pay off principal and interest.
Yet, when you have student loans, you have an “amount owing”. This amount owed can actually lower your credit scores. On the one hand, you think making payments should boost your scores, but then you bleed yourself out of having a high amount owed.
So what can you reasonably do about student loan debt? Do you want to pay it right away?
According to the likes of Stephen Snyder and Robert Kiyosaki, if you have student loan debt, you want to leave it as the last items you pay off. This is an IRS strategy. The history of this strategy has been around since student loans became necessary for people to go to college. The minute the IRS allowed you to use your student loan interest paid as a deduction is when this strategy came into being.
How it works
Each month you make a payment that you pay interest and a little towards your principal, when you pay again on the account.
When you file your tax return, you are prompted to enter the amount of student loan interest you paid.
The amount paid is a deduction.
During this same period, you pay a small portion of the “amount owed”, thus reducing the overall amount of your debt.
You also make payments, and as long as they’re made on time and for the full monthly amount, you’re helping your scores.
When you get to a point in the loan where you’re paying virtually no interest on the balance, pay off the debt.
Student loans, when you start taking them out, show up on your credit report, but without any payment history. It’s just an open payout account. Lack of payment history doesn’t help your score, or hurt it. The Debt Utilization Ratio, on the other hand, will hurt your score a bit. It is because you have this debt that your score is a little lower than if you had no debt.
If this is the only debt you have, it is also considered “little or no debt”, which also doesn’t help when trying to get new loans for build your credit history.
When it comes time to make payments to student loan companies under your installment agreement, you must be on time and pay the requested monthly amount. If possible, pay more than the monthly amount.
Paying interest helps reduce your taxes owed. You want this deduction and payment history. The deduction may be the only thing you have to get a tax refund. Payment history also helps you increase your score as the balance decreases.
There will come a time when you will repay the entire debt. Do it when the deduction on your taxes is no longer significant. Reducing the debt owed will also help at this stage. The reason behind this key point lies in the other credit you have built. You should be in your 30s or 40s, with a mortgage, credit cards, and other credits that weigh more on your ability to get credit. You no longer need student loan payment history. In fact, given how much debt you may have at this point, you want to reduce the “amount owed” you have overall.