When discussing family accounts as a way to build credit, it was mentioned that novice people usually have student loans as their first credit account, unless they get a car loan or credit cards associated with 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 think.
You might think that if you opened student loan accounts when you first entered college, a history of the account would be shown, but in reality, only when you start making your first payment, student loans count as ‘credit payment history’. Most student loans have a deferred status as long as you are in school. Once you’re out of school, you have one to four months before the companies start asking you to make monthly payments that pay the principal and interest.
But if you have student loans, you have a “debt amount”. This amount owed can actually lower your credit scores. On the one hand, you feel like making payments should raise your scores, but then you get reprimanded for having a high amount owed.
So what can you reasonably do about student debt? Do you want to pay it off immediately?
According to the likes of Stephen Snyder and Robert Kiyosaki, when you have student debt, you want to leave it as the last thing you pay off. It comes down to an IRS strategy. The history of this strategy has been around since student loans became necessary for people to attend college. This strategy came into being when the IRS allowed you to use the interest paid on student loans as a deduction.
How it works
- Every month you make a payment, you pay interest and a little on your principal, when you pay new into the account.
- When you file your tax return, you will be asked to enter the amount of student loan interest that you have paid.
- The amount paid is a deduction.
- During the same period, you pay a small portion of the “amount owed,” reducing your total amount of debt.
- You also make payments, and as long as they are on time and full monthly, you help your scores.
- When you get to a point in the loan where you barely pay interest on the balance, you pay off the debt.
Student loans, when you first start taking them out, will show up on your credit report, but without any payment history. It’s just an open checking account. Lack of payment history doesn’t help your score nor hurt it. The debt utilization ratio, on the other hand, will hurt your score a bit. It is because of having this debt that your score is slightly lower than if you had no debt at all.
If this is the only debt you have, it is also considered “little to no debt”, which also doesn’t help when trying to get new loans to build your credit history.
When it comes time to make payments to the student loan companies as part of your installment agreement, be on time and pay the requested monthly amount. If possible, pay more than the monthly amount.
By paying interest, you can reduce your taxes owed. You want this deduction and payment history. The deduction may be all you have to get a tax refund. Payment history also helps you increase your score as the balance drops.
There will come a time when you will pay off the debt in full. Do this when the deduction on your taxes is no longer significant. Reducing the debt owed will also help at this point. The reason behind this important point lies in the other credit you have built up. You should be in your thirties or forties, with a mortgage, credit cards, and other credit that weighs on your ability to get credit. You no longer need the payment history of the student loans. In fact, given the amount of debt you could have right now, you want to reduce the “amount of debt” you have in total.
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