Some years ago (in a different financial life, so to speak), I got really sick, and was hospitalized for several days. As most of us know, hospitalizations are quite costly – and the pain is double when you don’t have health insurance, such as when you’re between jobs or working part-time or in a freelance capacity.
I applied for financial assistance, and the hospital mercifully reduced many of the fees. But the doctor’s bills, ambulance and related procedure costs weren’t, leaving me with thousands of dollars in bills and no way to pay them off efficiently.
So, being an imperfect (and unemployed) human, I fell behind on my payments. Some of them ended up in collections. Naturally, my credit score suffered.
Fast forward several months later. Still unemployed during the depths of the recession, I decided it was an opportune time to further my education by getting an M.B.A. My credit was still blemished, but I managed to qualify for federal student loans, anyhow.
Over $100,000 of them.
Now, you might think this was reckless. You might say that having already weakened credit, the last thing I should do is pile on more debt. You might also suggest that if I didn’t manage to get a high-paying job out of business school, I’d be in doubly-deep poo-poo credit-wise.
And you’d be wrong.
Why my credit actually improved
It turns out I didn’t manage to get a high paying job on graduation; it took me several months to find any job at all.
But the $100k+ in student loans weren’t hurting my credit. In fact, they were helping it. In fact, my score rose over 100 points, taking me from the mid-500s range known as “poor” credit to the higher 600s range knows as “good”.
As credit expert, John Ulzheimer notes, installment debt such as student loans have a negligible impact on your credit.
But there were other factors at work here.
For starters, I didn’t default on my loans. You can be certain that should I have done so, my credit would’ve plummeted.
Instead, my loans were initially deferred until I started working. Once I started working, I began making payments under the federal Income Based Repayment plan (known better as IBR), which caps your monthly payments at 15% of disposable income.
It thus appeared on my credit report — and score calculations– that I was “on time” and managing the hefty $100k in loans responsibly. It was showing I was a good credit, even when I was jobless with over $100k in debt.
Many of my old medical debts which I hadn’t yet finished repaying were still on my credit report during this post-M.B.A. unemployment, too, so I couldn’t attribute the improvement to them being erased, or anything similar.
Nope, it was just the very fact that I had the debt and wasn’t defaulting.
And now that I am working full-time and earning an M.B.A salary, my credit has continued improving, especially as I’ve now paid off those old medical debts, too.
The moral of the story here is simple:
Credit scoring is a system full of quirks. Not all heavy debt burdens are equal, and depending upon your starting credit, it can sometimes even be beneficial (especially things like student debt, which can ostensibly lead to better earnings potential). We’d always advise you to be prudent with any debt, but this story demonstrates how, if you avoid outright default, few debt situations are without hope.