Student Loans Impacted my Credit

When I graduated grad school in 2015 I had a plan in place to pay off my $200k in student loans. I had a teaching job lined up and planned to find some extra tutoring jobs to increase my income. I had just started really looking at my personal finance in the months leading up to graduation, started budgeting, created my plan, and started looking at my credit score. I always thought my credit score was my lifeline to doing anything in my future and I only assumed that with my crippling debt that my score would be horrendous. Boy was I wrong, my student loans impacted my credit, but in a way I never imagined.

Of course, my student loans did impact my score, they obviously come up, but they didn’t impact it the way I had thought they would. My assumption was that my credit score showed how much debt I had, so my score would be terrible. How could it not be terrible when I was 22 years old and had accumulated $200k in student loans? What I didn’t realize was that your credit score simply shows how good you are at managing all the debt you have accumulated, the amount you have doesn’t necessarily matter. For example, if you keep your credit usage under a certain percentage, you have a good score because it shows you are good at managing your debt. If you always make your payments on time, you have a good score because you are good at managing your debt. My score at 22 years old fell in the “good” range, which excited me because I assumed I could get it to excellent quickly and refinance my student loans.

Again, I was very wrong about my credit score and how it is used. Within one year my score fell within the excellent range, I was so excited to refinance my student loans with a lower interest rate. The time didn’t matter to me, I wanted the lower interest rate to apply more money to the principal each month. With my excellent score set I did the paperwork to apply to refinance my student loans. Originally I was “pre-qualified” for a wonderful interest rate of 5%, a HUGE improvement from my 8% loans I was dealing with. This was simply based on a soft credit pull, meaning it doesn’t impact my credit score, but they get my credit score number. So, based on my lovely “excellent” score, I was viewed as a “safe” borrower and was rewarded by a great interest rate. That is until they did the final hard credit pull to determine my definitive refinanced loan. I was quickly denied because my debt to income was too high. So even though I had an excellent credit score, partially due to making 100% on time payments, I was denied because I had too much debt.

This was a part of my debt free journey that I didn’t expect. I was making huge payments every month, well over the minimum and had my nice “excellent” credit score, but still couldn’t help myself pay off my debt quicker because I had too much of it. This is where the credit score doesn’t make sense. I stuck to my plan and have now paid off 4 of those private student loans and every time an account closes, my score drops briefly. So, as I’m lowering my debt, lowering my debt to income ratio, my score drops initially, followed by an increase. Do you check your credit score regularly? How has it impacted your debt free journey?