Today’s topic, we’ve got a lot of clients that have been asking us over the last couple of months about student debt, student loan debt.
So, one of the thing that I want to share with you today is does student debt affect your credit score?
Let’s talk about that again, does the student loan affect your credit score? We’re going to talk about that.
Now, the first thing I want to share with you is that you have to know that right now in America, student loan debt actually just surpassed credit card debt, for the first time.
So, think about that for a second, think about how all these people have credit cards, right?
How could it be possible that student debt is actually higher?
So, what we’re going to share with you today is a little bit about FICO and how FICO calculates that information and how it will affect you with purchases moving forward.
First thing you need to know, that it surpassed credit card debt.
Number two is that your score can either boost or sink based on a few things that you may or may not know about student debt.
One of the things you got to know right up front is … Because you’re asking the question, well Mike, does it affect my purchases?
If I’m looking to get a car if I’m looking to get a house if I’m looking to get a credit card, how will the student loans affect?
So, first thing again, let’s talk about FICO for a second.
One of the things you got to know is that student debt is considered an installment.
So, what is an installment loan?
An installment loan is student debt, student loan debt, that’s installment, cars, houses.
What that means is that it’s a fixed payment every single month.
As opposed to a revolving line. So, a revolving line is just the opposite. It’s not a fixed payment, it could be different every month for your payment, and that would be considered typically a credit card.
So, as you spend a credit card your payment each month may be different.
Student loan usually is a fixed payment, that’s why it’s considered an installment.
So, the way FICO read it is no different, it’s not put in a separate category, from houses and cars.
So, that being said, it’s going to affect you. Now, it can affect you in a positive way or it can affect you in a negative way, but you need to know that it is an installment.
Now, here’s a couple of things you need to know. Because they’re treated the same, with a student loan, it’s the same thing as missing a car payment.
Guys, it’s the same thing as missing a house payment.
When I say missing, I don’t necessarily mean that it’s five days, three days, even 29 days late. What I mean by missing is when you went for your due date and then you didn’t make your payment for 31 days after that.
So, it was due on X, 31 days later, you actually forgot, something happened, life happened, whatever, and you actually missed a payment.
You need to know that student loan debt is the same as a car and house. Keep your payments … If you’ve got a couple of days late, yeah, you might be hit with a late payment, it’s frowned upon and you get smacked with a little fee for it, but it’s not going to affect your credit score.
Generally speaking, this is how it works. Someone with a credit score of say 680, if they miss a payment, they might get knocked anywhere between 60 to 70 points.
If you get a late payment … If you get a 30 day late and you’re in the 680 range, you’re probably looking at about 60 to 80 point decrease in points.
Somebody up in the 790 credit score, you get a 30 day late and you’re popping off 100 plus points.
Okay, so it is based on your credit score as to how much it will affect you by getting a 30 day late.
Back to student loans for a second, you guys need to know that it is not separated by category.
Meaning that it is factored the same way as cars and houses. Now, let me share something else with you.
The way that it works is, you can have as much student loan debt, generally speaking, as you want. So, if you’ve got student loan debt that is $300,000, FICO reads that as … So, it’s like this, let’s me give you an example.
You got a car. You went out and got a car, it’s a $50,000 debt. Now, you have a $50,000 loan, okay, the way FICO reads this is they don’t penalize you as if you have $50,000 in debt in revolving lines.
Okay, let me give you that comparison real quick.
You buy a $50,000 car, you put $1,000 down on it, you still have $49,000 debt. Again, that car’s an installment. Now, you have $100,000 worth of open credit cards and you spent $50,000 of that and it’s only 50% utilization as opposed to over there at the car, you’re probably 95-98% utilization because you’re debt is 49 out of 50.
But, because it’s revolving, it’s affecting your credit score so much more.
So, installment debt, you can have as much installment debt as you want and generally, this will not affect your credit score.
Don’t think about how much debt you have, think about it in terms of making your payments because that will affect you the same way as revolving.
You miss a payment on a credit card or you miss a payment on student debt, it’s going to affect you the same way.
It’s just that you can have more debt on installment than you can in revolving.
Now, let me give you another tip.
One thing that you don’t want to do, this is the tip of the day. A lot of people asking this, Mike, what should I do about these … I’ve got student debt that’s paid off, should I have it removed from my credit report?
That is an absolute no.
Typically student debt is when you were younger. Not saying everybody’s in college now, that ain’t older, what I’m saying is that if you’ve got … You’re 21 years old and you just went through college and now you’re 46 years old and you’ve got debt that’s been paid off for 20 years that’s on your credit report as a closed account.
If you remove that student loan, whether it’s paid or it’s debt, remember that you’re taking off the history, which is 15% of your credit score.
Literally, you could be at a 700 credit score and then just remove something that you think is a closed account that was a student loan, and you’re dropping yourself about 80 points.
Keep closed accounts on your credit report, do not remove them, whether it’s student debt or it’s a closed credit card.
Do not remove that from your credit report.
Age will always keep the glue together of your report because the longer your history, the more stability lenders see.
That being said, remember student loan can actually help you because it can give you that mixture as well.
I’m going to follow up with this. This will be the last thing I’m going to share with you guys today.
If you’ve got a bunch of credit cards, those are revolving. If you have no installment, if you don’t have a car, and you’re going through college and you get some debt, it can actually benefit you because then you’re getting the mixture of installment.
It is classified as an installment loan as opposed to revolving.
So, now you’ve got credit cards, you don’t have a car, you never bought a house, and you’re going through college, it’s fine. It’s actually a positive.
So, a student loan isn’t always negative, it can be positive if you’re using it from the standpoint of payments on time, towards an installment debt, and it’s also giving you the mixture between revolving and installment.
Making sure you guys are making your payments on time. Set up the student loans, because it is an installment, set up your student loans as autopay.
That’s your tip of the day.