Lenders and creditors report your credit data to the credit bureaus. The credit information on your report determines your FICO credit score. How well you manage your credit accounts impacts how high or low this score will be. If you have a defaulted student loan, paying that loan will help your credit score.
FICO Credit Scores
There are five factors that determine how high your FICO score will be. The score ranges from 300 to 850, according to FICO. Ten percent of your score is determined by the variety of credit types found on your report, another 10 percent is the amount of new credit you've applied for recently, 15 percent is the length of your credit history, 30 percent is the amount of debt that you have and the largest factor is your overall payment history, which accounts for 35 percent.
Significance
Payment history will have the largest impact on your score. Late payments damage your score. According to MSN Money, one 30-day late payment will drop your FICO score from 60 to 110 points. By the time your student loan reaches the default status, that level of delinquency has already imparted serious damage to your score. Paying off the loan can help your score if the account has not reached a charge-off status, which is when the lender writes it off as a loss. Once an account is charged-off, it cannot be rehabilitated or brought to a positive status. If it is charged-off, payment on the account will not alter the payment history on that account and that history will continue to negatively impact your score for seven years.
Considerations
The second largest factor in your score's calculation is the amount of debt that you have. If your loan still shows an unpaid balance, paying it off may help to raise your score. According to FICO, paying down balances on installment debts, such as student loans, improves your score. Generally, the less debt you have, the higher your score. How much the score rises will depend upon the other items present on your credit report.
Warning
If you pay the student loan balance in full, the lender will report the debt as paid. If you settle the debt and pay less than the amount owed, the lender will report the debt as paid-settled. According to Experian, settling an account can have a negative impact on your credit and credit score. In addition, future lenders may view a settled account on your report negatively, since you didn't pay all of what you owed.
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