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Student loan in the past, good credit in the future

Erica Sandberg

March 31, 2016

Q Hi Erica,
I made my last payment for my Stafford student loans ($20,000) just last month. After graduation, I got a job at my mom’s office. I make good money and have even saved some. I always paid my loan on time. With my student loan paid off, I feel an enormous weight off my shoulders. Now I have no loan or debt of any kind. I know the loan was on my credit report and boosting my credit score, but now that my loan is paid off, do you think I should get a credit card? I don’t want to over-complicate things. Thank you, Erica. — Chelsea

A Dear Chelsea,
You’ll be relieved to learn that your student loan won’t be disappearing from your consumer credit reports anytime soon. That’s because loans (and other accounts) that are paid as agreed upon are typically listed on a person’s credit file for up to 10 years, starting from the date of last activity. For you, that would be 10 years from last month, since that was when you made your final payment.

Even better, for as long as your student loan does remain on your file, it will have a positive effect on your credit scores. Lenders and other businesses will note the date the loan was granted, the original balance, and that you made your payments on schedule. All of that is working strongly in your favor and will do so for a year or two.

However, over time, that satisfied student loan will have less impact on your credit scores and with anyone reviewing your credit reports. This makes sense, as people’s circumstances tend to change over time. Anything can happen in a few years. A person who has been financially responsible in the past may not be later in life, and the reverse is true.

To maintain a high credit rating, you’ll need to add a steady stream of positive information to your credit reports. With this positive activity, credit scoring companies such as FICO and VantageScore will have enough current data to calculate your creditworthiness. If you ever want to borrow money for a car or a home, a high credit score will help you get the very best interest rates. If you want to rent an apartment or when applying for some jobs, a credit report filled with perfectly managed accounts can give you an edge over someone who has a damaged or thin credit history.

For all of these reasons, I do recommend obtaining at least one credit card. To do so, start by checking your credit scores. You can get your VantageScore for free, or your FICO score for about $20 per report from MyFICO.com. When you have your credit scores, shop for the credit card that best matches your credit rating and your needs (rewards card, cash back card, etc.). Watch out for fees, too. You probably will want a card with no annual fee and the lowest APR range. By selecting a card in your credit score range, you run less risk of your application being rejected. Since credit applications trigger a hard inquiry of your credit report and slightly (and temporarily) lower your credit score, you don’t want to apply for a flurry of cards at once.

I get the impression that you’re debt-averse, which is wonderful. Stay that way. Use your credit card as you would a debit card attached to your checking account. Charge only those things for which you have the funds on hand to pay the bill. Instead of waiting for a bill to be issued, hop online and make a payment. By doing this, you will guarantee that payments are made and posted on time, and you’ll never carry a balance and be charged interest.

Your on-time payments also will show up on your credit reports. Repeat this pattern every month and this positive data will cause your credit scores to rise steadily. And be sure to keep a keen watch on your credit card statements and credit reports to make sure they’re clear of errors.

That’s all there is to credit scores and building good credit — pretty simple, right?

Got a question for Erica? Send her an email.

SEE ALSO: Your guide to picking the right credit card

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