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Dip in Debt

How student loan forgiveness could impact your credit score

Thanks to the federal government, about 43 million people will have up to $20,000 in student loan debt wiped away. Of those 43 million, the Department of Education guesses 20 million will have their debt completely eliminated as a result of the new bill. This is a great thing, but any time debt is involved, you must consider how it might impact your credit score.

Let’s say you’re one of those lucky 20 million who will have no student loan debt after this process goes through in October. When debt goes away, it impacts your credit score because it changes your credit mix and your credit history. Your credit mix — which makes up 11 percent of your Vantage Score — is all the different types of credit and debt you have. That includes credit cards, mortgages, car loans and more. Lenders like when you have a good credit mix, because it shows you can navigate a variety of payments. When your student loan debt goes away, your credit mix will go down, and your credit score could take a dip.

As Money notes, the student loan forgiveness program can also reduce your credit history. You’ve likely been paying back student loans for quite some time. Removing them shortens your history, which makes up 21 percent of your Vantage score.

While this may seem like bad news, the good news is that any hit on your credit score from the loan forgiveness should be temporary. However, any dip in your credit is worth keeping in mind if you’re thinking of applying for a loan or making a big purchase in the near future. You might want to wait on that move until your score rebounds.

Content by Savvy Money

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