Debt reduction may result in a short-term drop in your credit score
Last month, the White House proposed a broad plan to forgive millions of Americans' student loan debt, erasing up to $10,000 in debt for some borrowers and $20,000 for those who received Pell Grants. Whatever happened to your credit score if you took out student loans? (they are loans, after all). And, for the millions of people who are qualified for student debt forgiveness, this future change in loan status will result in adjustments to your credit score, potentially for the worse—if only slightly. Here's what you need to know about how student debt forgiveness affects your credit score.
Your credit score may drop—at least temporarily
Student loans add to your credit mix, which is the number of loans you have (like a car, mortgage, etc.). The way you handle your credit mix affects your total score, and lenders like to see that you can manage multiple sorts of loans at the same time. Student debt forgiveness reduces your credit mix, which may result in a modest drop in your credit score.
Another reason student loan forgiveness may have a slight impact on your credit score is that it may reduce the average age of your credit accounts, as student loans are frequently among the first loans people take out.
Finally, none of this is cause for concern—your credit score would only decline by 5 to 10 points, according to CNBC. According to Money.com, as long as you continue to make your other loan payments on schedule, your credit score can recover rather rapidly. Perhaps a brief dip is something to keep in mind for the near future, but it is unlikely to impair your capacity to acquire loans in the long run.
The bottom line is that loan forgiveness is worthwhile
Anyone considering loan forgiveness should not be discouraged by a brief drop in their credit score. A few lost credit points are minor when weighed against the value of debt elimination. Keep in mind that even if your loans disappear off your credit report, you're still responsible for paying them—so if you're staring at your debt and thinking, screw it, you should learn what happens if you simply disregard your student loans.
The only other item to think about right now is how your credit score may affect your intentions to borrow money or finance a large buy. If you're in the market for a new automobile or house, get pre-approved as soon as possible so that your credit score is as high as feasible when you apply. The application for student loan cancellation does not even begin until early October, therefore modifications to your credit score will occur much later.
#Biden #StudentLoan #CreditScore #StudentLoanForgiveness
SOURCE: lifehacker
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