Student loan debt is arguably the number one homeownership obstacle millennials in Florida face. It can make even the most affordable properties out of reach. Even if you did not over-borrow, repaying your student loan robs you of the valuable time you could have used to save for a down payment. It can also keep your debt-to-income ratio too high to qualify for a home loan.
But you can actually use this debt as a tool to build your credit. Below are effective strategies to use your student loan to maximum effect to impress mortgage lenders and companies in Naples and Fort Myers when you shop around.
Don’t Miss Payments
You need to pay your student loan on time and in full. In most versions of the FICO credit scoring model, payment history matters most. It accounts for 35% of the scorecard. Since you’re probably stuck with your student loan for a decade, a lengthy excellent payment record will drive your FICO scores up come mortgage application.
In case your student loan account is delinquent, take swift action to bounce back. One late or missed payment is forgivable when you show a sense of urgency to recover.
Think Twice Before Paying It Off Early
There’s a long list of advantages to prepaying your student loan. First, there are no prepayment penalties, so you can pay off your financial obligation ahead of schedule without any negative consequence. Second, reducing your principal naturally saves you on interest. Third, you can experience some peace of mind knowing you’re free and clear of this burdensome debt.
However, the credit account closes once the debt is fully repaid. It may decrease the average age of your accounts and shorten the verifiable payment history lenders can scrutinize.
A clever strategy you should consider is applying for a mortgage as the maturity of your student loan nears. This way, you won’t be as indebted come application, and you’ll surely enjoy the benefits of having an old credit account.
Use Your Credit Card at the Same Time
FICO places a premium on credit mix. Handling your student loan and credit card payments is one way to demonstrate your ability to manage your finances responsibly.
However, avoid using more than 30% of your total credit card limit. If you want to use your plastic more without pulling down your FICO scores, ask for a credit limit boost. This way, your buying power grows stronger while your credit usage can remain at the same level.
Check the Accuracy of Your Reported Payment Details
Make sure that your punctual and full student loan payments count. Make it a habit to review your credit reports from Experian, Equifax, and TransUnion at least once a year to catch small (but serious) errors. If left unaddressed, these negative items in your file can jeopardize your chances of qualifying for a mortgage.
A student loan can be a good debt. If you play your cards right, you can turn this liability into an asset that can help you buy your dream home someday.