Why Paying Off Your Student Loans Could Actually Hurt Your Credit


When Having No Student Loans Hurts
Student loans are installment loans, meaning you make payments over a set period of time, and once the loan has been repaid (with interest), the account is no longer active. One of the main factors determining your credit score is your mix of credit accounts, and a combination of installment and revolving accounts will help your score. (Revolving accounts, like credit cards, allow you to repay your balance and borrow up to a certain limit over and over again.)

If student loans are your only active installment loans, paying them off will change your account mix. This category of your credit score shows how good you are at managing multiple accounts of varying structure at the same time, and without different active accounts, there's no recent information supporting your ability to do so.

"If that student loan is really the only installment loan experience, by virtue of having no more active installment loans, that's certainly going to be factored in," said Ethan Dornhelm, principal scientist of the Scores Development Group at FICO.