There’s no sunshine without rain, and it looks like Biden’s student loan forgiveness plan may give borrowers a fair share of both.
Questions continue to swirl about the impact of widespread forgiveness, including the pressing question of whether loan forgiveness will have an impact on a borrower’s credit score. Experts suggest that yes, it can hurt your credit score—read on to learn how.
How Will My Credit Score Be Affected By Student Loan Forgiveness?
Anytime you pay off a loan, it sends a ripple effect through your credit score. Student loan forgiveness is no different.
If your student loan will be entirely forgiven — a reality for 20 million borrowers — your credit score may take a dip. That’s because paying off a loan changes your credit mix, credit utilization, and credit history a bit.
Your credit mix is the variety of types of debt you have. Demonstrating multiple types of loans and credit accounts (think credit cards, auto loans, etc.) can help your credit score. So, when you close a loan, it can reduce your credit mix, which may cause your score to drop. A good credit mix is thought to be helpful in achieving a good credit score. This area makes up 10% of your FICO credit scores
Credit utilization for installment loans refers to the current balance you are carrying on the account in relation to the original amount (age) of your loan. This makes up 30% of your FICO credit scores. If your student loans are forgiven or the balance is reduced, this is a good thing. Less debt = Less risk (lenders like that).
Will the Decrease to My Credit Score Be Permanent?
Experts predict that any change to your credit score will be minimal and temporary. The best thing you can do is simply to keep a check on your credit score and take action if something doesn’t look right.
The good part about credit scores is that they are flexible; they can change for the better. If your scores aren’t where you want them to be now, you aren’t stuck with bad credit forever. There are lots of ways you can proactively increase your credit score, such as paying bills on time, paying off debt without taking on new debt, and reviewing your credit report to find errors that you can dispute for deletion on negative accounts.
Could My Credit Score Possibly Increase?
Some borrowers may see an increase in their credit scores as a result of student loan forgiveness. This is because paying off a debt will reduce your debt-to-credit ratio (utilization), which is factored into your credit score.
With less debt, you have more “wiggle room” with your available credit, which puts you in a better position to repay what you borrow.
What to Do Next
Whether you’re paying off a loan or the federal government is paying it off for you, it’s always essential to work on your credit score. When changes like these happen, for better or worse, you’ll be in the best position to mitigate any side effects.