Student Loans and Creditworthiness

Question

In reading This Question about UK student loans I cam across several answers that state that student loans do not impact credit score beyond limiting the amount of disposable income used in the loan size calculations.

This directly conflicts with what I was told when applying for a mortgage, as my wife carries over 300,000.00 USD student debt, and her score was impacted by 100+ points in a 13 month period (The previous data point was a car purchase that ended up in my name due to her lack of income, her score dropped from 828 to 694 during that time).

During this time, she acquired no new debt outside the student loans, and did not change her spending habits concerning credit cards. The usual impact factors on FICO (length of history, black marks, debt utilization ratio, etc.) did not noticeably change, as we researched what we needed to do for applying for a HELOC in advance, and stuck to it fairly well.

As per comments, her student debt did increase, to the tune of ~60k USD between the 2 loan applications. This is done through loan installments per semester at school, and the final 300k USD figure is after the final installment (meaning it would have been around 240k USD at the time of the car purchase).

My question is : Does anyone know if there is a certain point where student debt begins to impact credit score/creditworthiness? If so, what are the criteria?

Answer 1

Well, its just not as simple as the loan amount being over a threshold. The FICO model is very complex and interactive. It sounds as if you wife may have a somewhat "thin" file. Often a thin file may score fairly high, but will drop more drastically when new accounts are added or credit card balances rise. New accounts added will reduce your Average Age of Accounts - ordinarily a new account may not have a large impact on this metric, but Student Loans tend to add a bunch of individual loans rather than one large one. With a thin file this can reduce a 10+ year AAoA down to less than one year all at once. That can take a good amount of points.

Another factor that can add downward pressure is that if one is not yet started to pay down those loans, the interest causes the balances to rise - above what the original loan amount was. This is similar to going over your limit on a credit card account, and FICO can hit you pretty hard for it.

To help recover her score I would look at maximizing her credit utilization on her credit cards. The easiest way to do that is to use the "AZEO" method - All Zero Except One. On the one card that shows a balance, you want to stay under 10% of its limit when the statement closes. And if its feasible, start paying the school loans down, even though its not required yet.