Are you a millennial with credit card debt or a student loan? Maybe you have both. Keep reading to see how these two things can affect your credit score and what you can do to improve on it.
The Cares Act and Debt
The subject of how people aged 24-38 are handling their finances amid the Coronavirus pandemic is an interesting one. According to a report from the Federal Reserve Bank of New York issued August 6th the credit card balances of Americans regardless of age dropped by $82 million in just the second quarter of 2020. In a recent online Covid-19 and Finances survey 22% of millennials either already used or were planning to use their $1200 stimulus checks to pay down credit card debt.
The passage of the CARES Act in March and subsequent memorandum signed by the president this month allowed for the deferring of federal student loans and ceasing of interest payments until at least January of 2021. Those who have had their loans deferred saw an immediate increase by an average of nine points on their credit score by not having to make student loan payments in the coming months. This is due to the fact that because no payments are expected during the next several months, the financial burden on the debtor has been eased, thereby raising the credit score.
Credit to Debt Ratio
While payment history is the most important factor affecting a person’s credit score, debt to credit ratio also plays a major role. Look at the following examples:
Person A Person B
Credit Limit $5,000 Credit Limit $5,000
Current Balance $2,500 Current Balance $2,500
Credit Utilization Ratio 50% Credit Utilization Ratio 50%
Stimulus Check Payment $1,200 Stimulus Check Payment $500
CUR After Payment 26% CUR After Payment 40%
Person A who opted to use their entire Coronavirus Stimulus check to pay down credit card debt saw their Credit Utilization Ratio drop to 26%. The CUR is simply a look at your debt-to-credit ratio which shows how much of your available credit you are currently using. Meanwhile Person B who used $500 to pay down the $2,500 balance saw their CUR drop only to 40%. Person A will see a more positive reflection on their credit score than will Person B.
A cautionary note for those who have had their Federal Student Loans deferred: Unless the grace period is extended come January of 2021 the burden of making those payments will resume, nullifying the uptick in the credit score.
If you are making payments
If you have not had the payments deferred, take advantage of the automatic interest free period in effect until January 2021. If your income allows, make larger payments on your student loan which would be working entirely on knocking down the principal amount. Having a smaller principal amount left to pay would of course have a positive effect on your credit score.
Many people have had financial difficulties during the pandemic and if you need assistance with finding a method of continuing to pay your Federal Student Loan, contact your loan service provider to discuss one of the many options that may be available to you.
If you are struggling with crushing student loan debt, you may have options. People commonly believe the student loan agreements cannot be altered, but that is not true. The attorneys at Dsouza and Strachan Law Group have the knowledge and experience to get you out from under the heel of student loan creditors and on the path to financial freedom. Contact Dsouza and Strachan Law Group today for a free consultation.