Should I take a student loan if I don't need it, just for the credit mix factor? (Credit score 723)

[Anonymous]

Hi! I was offered a Federal Subsidized Student Loan (no interest until 6 months after graduation). If I decide to take it, for sure I'll pay it off before my graduation, so it wouldn't accrue any interest. I have money saved to pay for school, so financially speaking I don't need it. I'm just considering taking it for the purpose of improving my credit, which is currently around 718-728, but I only have revolving credit (two bank's credit cards), I have never had an installment loan and I know that's a factor lenders take into consideration when applying for a mortgage, which is something I'm planning to do maybe in 1-2 years. What should I do?

[Anonymous]

[Anonymous]

Thank you Morpho! Could you explain a little?

[calyx]

With the caveat that I really don't think people should take on debt when they don't need to, AND I would be concerned since student loan servicers aren't the greatest...  maybe?

What do your emergency savings look like?  Is all of the money you have saved up going to pay for school or do you have savings on the side for emergencies?

Part of what I see is people borrowing more than they need to for college and getting stuck with payments, particularly when they don't budget well coming out of college and spend extra money instead of paying off that loan.

[Anonymous]

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@Anonymous wrote:

Thank you Morpho! Could you explain a little?

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I just think the whole optimizing score game that’s promoted is mostly unnecessary for a large portion of people. First of all that’s not the way an UW reviewing your mortgage app will look at it. Installment loan=better chance at mortgage is false.

Other factors: You will get some boost to your score for the mix, but the inquiry, new account, and average age reset will be a negative to your score at first. Once a significant portion of the loan is paid off you get maximum benefit. But the main issue is the monthly payment is now part of your DTI ratio which is much much more important than your score. The loan payment could push your DTI too high to get any loan regardless of your score. Your score is a predatory of wether the money you borrowed or credit extended will be repaid. Your DTI determines wether you can actually pay them. Your score is theoretically, your DTI is actual.

Mix is 10% of your score. Pay your bills on time. Never be late, ever. Keep your utilization low, and don’t apply for credit frequently. Those 3 things are literally 75% of your score.

But @Calyx raises a compelling point about your savings and emergency fund. If dropping a chunk on school will wipe it out then a 0% loan is actually responsible use of credit and that is a good reason to take the loan imho. Good luck.

[Anonymous]

I get it, but no. Take out a Share Secured Loan (SSL) somewhere if you're worried about credit mix.

[Anonymous]

@Anonymous, there is no inquiry for a federal student loan. But I agree that the emphasis on raising credit scores is overkill, unless you are a rebuild. 🙂

[Anonymous]

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@calyx wrote:

With the caveat that I really don't think people should take on debt when they don't need to, AND I would be concerned since student loan servicers aren't the greatest...  maybe?

What do your emergency savings look like?  Is all of the money you have saved up going to pay for school or do you have savings on the side for emergencies?

Part of what I see is people borrowing more than they need to for college and getting stuck with payments, particularly when they don't budget well coming out of college and spend extra money instead of paying off that loan.

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This is the principal reason why I did not take student loans even when I could (Around 2000 per semester with books, 4 left, expecting a small reduction on the third year). I do not really trust student loan servicers at all. I already deal with institutions trying to take off my money (Banks) and anyway, I have a card with a 18 months 0% APR, I know it is not the same, but I work for something and taking out unnecesary debt would only create bad habits on myself.

[Anonymous]

Dude you can raise your credit score without having to take out a student loan. It takes time for the credit score to go up. Be patient

[Anonymous]

I agree with the SSL as opposed to a student loan. While it might cost you an inquiry, you can take out a more reasonable amount and pay most of it off immediately to get the intended affect.
I could see the benefit of what you could possibly do or save with that money, I think it's a slippery slide. There is also a temptation if you don't pay it back immediately. That coupled with all the things that could, and often do, go wrong with student loans, it's a no from me. Imo you don't take on debt like that to improve your credit score.
There is one other factor. You admitted you don't need it for education or education related expenses. This means anything else you may think you can spend will actually mean you too out the loan for fraudulent purposes. If I'm not mistaken they actually ask you what your expected financial contribution would be. If you mentioned that you had enough in savings, they wouldn't offer the loan. You don't want to get mixed up in that.
You talk about your credit score but also talk about a subsidized loan (not graduate), I wonder how old you are. Lenders aren't just going to look at your score, but at the other details in your file, your income, etc. If you're looking for ways to improve how you might look to lenders I would recommend asking for solutions from the mortgage topic. Good luck.