Student Loan Balance Affecting Credit Score

[Anonymous]

Hi Everyone! I'm hoping to get a little bit of insight on my current student loan situation. I am trying to gain some points on my credit score to qualify for a mortgage. While playing around with the myFico simulator, I noticed that I would gain approximately 20 points by paying off student loans. Looking further at the simulator, I saw that the breakpoint where I would gain the most points was if I paid approximately $8800 toward my loan balance. Currently, my student loan balance amount is above the original loan amount, by approximately $8800. From reading other posts here on the forum, I know not to rely too heavily on the simulator, but what I'm taking away from this is that my loans being at above the original amount is dragging down my score, maybe in the ballpark of 20ish points. Does anyone have any similar experiences? Has anyone had a score increase by getting their loans under the original amount? I'm seriously considering putting a dent in the loans (I have the available cash) to hopefully reap the scoring benefits...as well as the reduced interest amount over time. Any insight would be much appreciated!

[Anonymous]

Welcome to the forum, bakerer!

Hopefully, someone will weigh in on utilization for a student loan. If they work like other installement loans, then you'll definitely see improvement in your score as you reduce (presumably) below 100% and also when it drops below 80% at at other marks, too. But I'd like to hear an opinion more informed than my own specifically on student loans.

There's another important consideration that isn't built into your FICO scores, and that is Debt to Income (DTI) Ratio. That's a ratio of your monthly debt payments each month to your income. The CRAs don't know what your income is, so they can't factor it into your score, but it's a significant consideration for your bank. Your bank is going to consider everything -- credit card payments, auto loan payments, students loans and your potential mortgage payments. They want all of those under a certain percentage of your income (perhaps 40%, but it's based on a variety of factors). So if you could pay off one entire student loan account and eliminate that payment, it may help more through DTI than it even does through your FICO score.

[Anonymous]

Thank you, Plip!

My main concern right now is my mortgage score- I paid my car loan off last month and my score took a pretty big hit. Right now, I'm scrambling to make up for the damage this did to my score. Other than that, everything else is stellar for my mortgage application- my husband and I have good incomes, plenty of savings, 20% down payment,  zero debt (besides student loans) and we never carry balances on our credit cards. CCs are paid in full every month. Our DTI is excellent.  I did pay all of my cc balances to zero this month and let one card report a small balance, so really, I'm hoping that paying my student loans down to below 100% of the original loan amount will help me recover some of the points I lost by paying off my car loan. Had I known that paying off a car loan hurts your credit score, I certainly wouldn't have done it right before applying for a mortgage! Live and learn!