So, I am a full time college student. I’m not in repayment with my loans at all. I thought I would pay off some of my loans before I graduated and it would help my score. However, my score went down because I closed out off some of my loan accounts by paying in full. My debt went down and so did my credit. Why is this?
First of all, remember that a credit score is a relatively crude number that attempts to predict your ability to repay a loan offered by a future lender. You are much better off in the long run with less debt no matter what the number is.
Two factors that go into your credit score are the average and total length of your credit history, and the amount of debt you have relative to your total credit limit, or your credit utilization percentage. If the student loan you paid off was the first credit line you ever had, then by closing it you have shortened your credit history. Even if it wasn’t your oldest form of credit, it was probably one of your older forms so closing it reduced the average length of your credit history. You also reduced the total amount of credit available to you.
Your credit score will go back up over time. if in the future you have funds to pay off more student loans, you can pay off the newest one rather than the oldest one, or pay it down to a low amount but leave it open, and then you would make the last payment after you graduate. You could also consider adding a credit card to your portfolio, because overtime, that will add to your average length of credit history and it will increase your credit available to you and decrease your utilization (as long as you don’t use the credit card too much). However, be aware that opening a new credit line will also temporarily drop your credit score.
*Answers are correct to the best of my ability but do not constitute legal or tax advice.* **If a post answers your question, choose it by clicking on "Mark as Best Answer".**