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Student Loans Are My Only Installment Loan, and I’m About to Pay Them Off — Problem?

Aug. 16, 2016
Credit Score, Personal Finance
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Congratulations, your student loans were your only installment loans, and you’re about to pay them off. You may be wondering from a credit score standpoint: Is this a problem?

Not really. Here’s why.

The five factors

Your credit score has five major elements:

  • Your history of paying on time.
  • How much of your available credit you’re using.
  • How long you’ve had credit.
  • Whether you’ve applied for new credit lately.
  • The types of credit you use.

The biggest of the five

If you’ve made good on your student loans, and especially if you had no delinquencies, your efforts have helped your score a lot in that first category. Paying on time is the biggest single factor in determining your score from FICO, which is the one used in most lending decisions, or from VantageScore, FICO’s competitor.

“Length of credit history” 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 “installment loan” from your “types of credit used” will hurt your score. Actually, the information about your paid-off installment loan can stay on your credit report for up to 10 years. That’s a good thing, provided the information shows good credit behavior. Creditors will love that you paid your student loans off on time and in full.

If it was your only installment loan, you could lose “a few points” on your credit score, says credit expert Barry Paperno, who blogs at Speaking of Credit. The “types of credit used” 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’s an added wrinkle that will help your credit score, provided you keep up your responsible behavior. You obviously were budgeting wisely, because you 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’s college fund. Those are great choices. But if you have existing credit card debt, think about paying it off 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 if it’s time to replace that installment loan with another. That would likely help your credit score if it restores a second kind of credit to your mix. If you are thinking about getting a new or used car that you’ll have to finance, you could use the freed-up cash toward that purchase.

Updated Aug. 16, 2016.