What can loan forgiveness mean for your credit score?
With President Joe Biden’s announcement of his student loan debt forgiveness plan, many borrowers may be wondering how this will affect their credit score.
Economist and professor at Florida Gulf Coast University (FGCU). He said there is an opportunity if you are one of the 20 million Americans who have thousands of student debts to be forgiven. An opportunity if done wisely can make your credit shine.
“It’s not money in your pocket today, but it’s $10,000 less than you owe,” said FGCU economics professor Victor Claar.
Claar said the impact of student loan forgiveness could be significant to a person’s personal finances.
“For your typical American who is a college graduate, he has debt close to the price of a new car. Somewhere between $20,000 and $30,000 low,” Claar said.
The president’s student loan relief plan aims to eliminate at least $10,000 of that debt for borrowers earning less than $125,000 a year. According to Measure One, a university data company, 92% of student debt is federal loans.
“A lot of people are wondering whether or not it’s appropriate to have a bailout for college graduates,” Claar said.
This is not the only question, some may wonder what impact will this have on a borrower’s credit rating. Creditrepair.com reports that loan forgiveness can impact your credit score. In fact, it can cause it to dive for a short time. Since federal student loans are installment loans and your credit rating benefits from diversification such as student loans and car loans, if this installment loan is closed, it may cause a temporary downgrade in the rating. credit.
Claar said that’s also the case if you decide to use that saved money to close a credit card.
“When looking at your credit score, several factors come into play – the length of your history – ironically, if you cancel credit cards you don’t need, it can lower your credit score because ‘they’re looking at your history,’ Claire says. “For most people, the best thing you can do about your credit score is pay your bills on time – especially if you can afford to pay in full every time, that’s great for your credit score and reduces the amount of interest you pay.”