I have a consolidated federal student loan that just switched over to the standard payment plan, more than doubling my monthly payment. The payment amount is not a hardship at all, it's just annoying. The loan rate is 2.75%.
I have been working diligently for nearly a year to increase my scores, and as of a few weeks ago all of my scores were finally at or above 640. I would like to be in a position to buy a house next year.
I have two credit cards (both Cap One), which I pay in full every month, and these student loans -- that's my entire active credit usage. I have the cash to just pay off the student loans, and would prefer to. However, I am concerned about my FICO scores dropping due to lack of an installment account actively reporting, especially if I go to apply for a mortgage in six months. On the other hand, paying this off would drop by debt-to-income ratio to zero.
Am I overthinking the score drop issue from paying these off?
Thanks so much!
If these are your only installment loans, especially with a relatively thin credit file, you will probably see some score drop. I don't think it would be drastic, but it's hard to predict exactly what will happen with your score.
Since you're definitely in a mode of trying to build more history, if you have more than one tradeline reporting on your consolidated loan, I would just pay off one part of the loan and continue to make payments on the other. That's the best of both worlds, lower DTI + continuing to show good credit mix and build history. If that's not an option, I'd say do what feels best financially. You'll probably recover any lost points as those credit cards age.
Oh, I've got a thick credit report. I've been using credit for 17 years now. The problem was a 2008 bankruptcy, and recovering from that.
I do like your idea, though. I have two loans on the consolidation. I could just pay off the bigger of the two, and leave the smaller one and it will still report. Great solution, I'll do that!
Thanks so much!