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Contributor
Posts: 132
Registered: ‎01-01-2017
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Closing out loans and effect on credit score

Hi all,

 

My first reportable credit items were a couple of student loans, and only after them did I start to get involved in CCs/revolving debt. I'm concerned that when I pay them off and the accounts are closed, my AAoA is going to go down drastically since my oldest accounts will be closed. Is there any way to hedge against such a drop other than just letting time pass so that my credit cards have aged standalone?

 

Thanks!

Super Contributor
Posts: 5,987
Registered: ‎02-24-2015

Re: Closing out loans and effect on credit score

[ Edited ]

mkhan1093 wrote:

Hi all,

 

My first reportable credit items were a couple of student loans, and only after them did I start to get involved in CCs/revolving debt. I'm concerned that when I pay them off and the accounts are closed, my AAoA is going to go down drastically since my oldest accounts will be closed. Is there any way to hedge against such a drop other than just letting time pass so that my credit cards have aged standalone?

 

Thanks!


The only thing you have to worry about is the score drop when your last loan drops to zero. This is only on some scoring models, most notably FICO 8.

 

A good way to protect against that is to take out a small share secured loan as follows: Join Alliant Credit Union, take out a $500+ savings account, take out a $500 share secured loan secured by the savings account with a 48 or 60 month term, decline or cancel autopay, transfer $455 from the savings account towards the loan balance bringing the balance down to $45. Pay that off slowly over the balance of the term. Once you have that in place you can pay off any other loans without the score drop.


FICO8 EQ 767 TU 803 EX 773 FICO5 EQ 722 Total revolving 419500
Community Leader
Senior Contributor
Posts: 4,240
Registered: ‎07-17-2014

Re: Closing out loans and effect on credit score

To address the specific worry of the OP, closing accounts does not affect one's AAoA at all.  Only when the closed account falls off his report will there be an affect on AAoA, but that almost certainly won't happen till ten years after close date.

 

Great response by SouthJ.  Small tweak to what he said.  It is possible to pay off a loan and for that to cause a score hit even though he has other loans still open.  For example suppose our OP has two loans of 10k and 50k on which he owes 9k and 1k respectively.  He owes 10k total on 60k worth of loans.  So he owes 16.7% of the original amount.  He then pays off the 1k balance.  He now has 10k of open debt on which he owes 90% of it. 

 

In short, the payoff of one loan (even though he still had another open loan) caused his installment utilization to go from 16.7% to 90% which will also most certanly mean a score drop, perhaps a decent sized one.

 

The first line of attack for our OP should be for him to contact the company handling those loans and find out whether they will permit him to pay off most of the loans early but keep them open.  This is called pre-payment of the loans, and causes the next payment due to be extended far into the future.  If that is how that lender works, that would be an attractive option.  Keep both loans open, and pay each down to < 9%.  Then if either loan eventually has to be paid off, the other is still at < 9%. 

 

Then, as SouthJ suggests, put in place an Alliant SS loan that is mostly paid off before the last loan gets paid off.

Established Member
Posts: 11
Registered: ‎01-13-2012
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Re: Closing out loans and effect on credit score

Thanks for the explanation on installment loans, I couldn't figure out why I dropped 17 points when I paid off my car loan while I still had an RV and a Motorcycle installment loan, but indeed my car loan was the highest original balance and the lowest % owed, so now I see why I got the hit when I paid that one off, thanks again.  

Contributor
Posts: 132
Registered: ‎01-01-2017
0

Re: Closing out loans and effect on credit score

Wow, thanks so much for the tips guys - I would have never thought about those workarounds myself

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