Speaking of family accounts as a way to build credit, it was mentioned that people starting out will typically have student loans as their first credit account, unless they get a car loan or credit cards tied to a family member with credit history. Student loans are a tricky area of ​​installment credit history because they don’t look as favorably as you might imagine.

You might think that opening student loan accounts when you first went to college would show account history, but in reality, it’s only when you start making your first payment that student loans will count as “credit payment history.” Most student loans have deferred status while you are in school. Once you’re out of school, you have one to four months before companies start asking you to make monthly payments that pay off principal and interest.

However, when you have student loans, you have an “amount owed.” This amount you owe may actually be lowering your credit scores. On the one hand, you feel that making payments should increase your scores, but then you get criticized for having a large amount owed.

So what can you reasonably do about student loan debt? Do you want to pay it immediately?

According to the likes of Stephen Snyder and Robert Kiyosaki, if you have student loan debt, you should pay it off last. It all comes down to an IRS strategy. The history of this strategy has been around since student loans became necessary for people to go to college. The moment the IRS allowed you to use the interest on your student loan paid as a deduction, that’s when this strategy came into effect.

How does it work

• Each month you make a payment, you pay interest and a little toward your principal, when you’re paying back into the account.
• When you file your tax return, you will be asked to enter the amount of student loan interest you paid.
• The amount paid is a deduction.
• During this same period, you are paying off a little of the “amount due,” thus reducing the total amount of your debt.
• You’re also making payments, and as long as they’re made on time and in the full monthly amount, you’re helping your scores.
• When you reach a point in the loan where you’re barely paying interest on the balance, pay off the debt.

Summary

Student loans, when you first start taking them out, show up on your credit report, but without any payment history. It’s just an open installment account. Lack of payment history doesn’t help or hurt your score. The debt utilization ratio, on the other hand, will hurt your score a bit. Because you have this debt, your score is slightly lower than if you had no debt at all.

If this is the only debt you have, then it’s also considered “little or no debt,” which also doesn’t help when you’re trying to get new loans to build your credit history.

When it’s time to make payments to the student loan companies as part of your installment agreement, you must be on time and pay the requested monthly amount. If possible, pay more than the monthly amount.

Paying interest helps reduce your taxes owed. You want this deduction and the payment history. The deduction may be the only thing that helps you get a tax refund. Payment history also helps you increase your score as your balance decreases.

There will come a point where you will pay off the debt in full. Do this when your tax deduction is no longer significant. Debt reduction will also help at this point. The reason behind this key point lies in the other credit you have built. You must be between 30 and 40 years old, with a mortgage, credit cards and other credit that weigh more heavily on your ability to obtain credit. You no longer need student loan payment history. In fact, given the amount of debt you might have right now, you want to reduce the “amount owed” you have overall.