topic Re: Should I bother keeping student loan accounts open? in Understanding FICO® Scoring

Should I bother keeping student loan accounts open?

Anonymous — Tue, 17 Jan 2017 06:11:38 GMT

I recently had the opportunity to pay off two small student loans.

On a hunch, I decided that it might be better for credit purposes not to pay off the account in full. These are my only open installment loans.

I left a balance of about $5 on each, and no payments are due for several years.

I understand that keeping the accounts open a bit longer will be beneficial in the long run because the accounts should remain on record for 10 years from the date of last activity.

Would my FICO take a hit in the short term if these only installment accounts were paid in full and closed?

Re: Should I bother keeping student loan accounts open?

SouthJamaica — Tue, 17 Jan 2017 12:51:50 GMT

@Anonymous wrote:
I recently had the opportunity to pay off two small student loans.

On a hunch, I decided that it might be better for credit purposes not to pay off the account in full. These are my only open installment loans.

I left a balance of about $5 on each, and no payments are due for several years.

I understand that keeping the accounts open a bit longer will be beneficial in the long run because the accounts should remain on record for 10 years from the date of last activity.

Would my FICO take a hit in the short term if these only installment accounts were paid in full and closed?

On a short term basis, your FICO 8 score will lose points because you will have no open installment loans. Right now you are getting points for having a low balance against a high original loan amount. So from a pure scoring perspective, yes keeping them open with minimal balance is cool.

Me, I get nervous about keeping things open. What if I forget about the $5 balance, or if something happened to me, etc.

If you would like to get something new to take the place of the student loans, which is quite painless, you could do this:

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 it reports you'll be safer to close out the student loans in terms of scoring. That will cushion the scoring blow of closing the loans.

As I see it, the only negative from your perspective is that you'll be having a new account, which might cost you a tiny bit in scoring, but there's no hard pull.

Re: Should I bother keeping student loan accounts open?

Anonymous — Tue, 17 Jan 2017 14:44:06 GMT

I made the same choice as you a year ago -- to pay down my student loans to a low amount and extend the next payment due for a long time.

I'm curious: how old are your SLs now, and how old will they be when you make the next (and presumably last) payment?

The penalty for going from where you are now (total open installment debt paid way down but stiil open) to no open loans of any kind is about 30 points for FICO 8.

The path SouthJ suggests is fine too. (The Alliant Share Secure Loan.) You can read about it here. All you need to do is read the first few posts in the thread:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secure-technique/m-p/4506756

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 00:57:07 GMT

@Anonymous wrote:
I made the same choice as you a year ago -- to pay down my student loans to a low amount and extend the next payment due for a long time.

I'm curious: how old are your SLs now, and how old will they be when you make the next (and presumably last) payment?

Also curious about one other thing. Are your student loans your oldest open accounts?

Mine were, which is yet another reason I opted to keep them open for as long as I could. "Age of oldest account" is one of the three factors that determine which scorecard you get placed in, for clean profiles anyway.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 19:08:19 GMT

>> Me, I get nervous about keeping things open. What if I forget about the $5 balance, or if something happened to me, etc.

Sometimes I think we're all on this forum because we've learned a lesson of this sort the hard way.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 19:11:33 GMT

The accounts are only about two years old at present, but they would be 10 years old at maturity. Having them on record for an extra 10 years, as > 10 year old accounts, would probably be a positive contribution to my average age of accounts based on my profile and assuming I open new accounts in the intervening time.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 19:37:12 GMT

@Anonymous wrote:
The accounts are only about two years old at present, but they would be 10 years old at maturity. Having them on record for an extra 10 years, as > 10 year old accounts, would probably be a positive contribution to my average age of accounts based on my profile and assuming I open new accounts in the intervening time.

I agree with you 100%. That's why I made the same decision is you appear to be leaning toward.

You haven't mentioned, however, whether these are your oldest open accounts. For example, do you have a credit card that was opened earlier than these student loans?

The reason I ask is that there is a different scoring factor from AAoA (Average Age of Accounts) and this is Age of Oldest Account. If these are your oldest open accounts, then you will be helping that factor too, way down the road, and that's an important factor, since it is used in scorecard assignment.

My student loan was also my oldest open account, so it made the decision to keep it open another 10 years a total slam dunk.

Final note to anyone contemplating doing what our OP has done, i.e. paying a loan amount down to an extremely small balance and then keeping the loan open. If the dollar value is incredibly tiny (e.g. the $5 our OP has) then some lenders may choose to close out the account entirely after a year or two of no activity rather than keep it open (the overhead is just not worth getting the $5 from you 10 years from now). I had a very friendly loan expert at the loan servicer for my SL when I was making this decision, and she talked to me quite frankly about this. I think her recommendation was to keep $30 in an account like this -- based on the internal policies at her institution -- if I wanted to have no risk of early closure.

Of course, our OP may well have no problem. It's just that is possible to have an early closure when the amount is that tiny.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 19:58:02 GMT

Thanks for the input.

For me, oldest open account wasn't a factor here; I have open accounts that are a bit older. Also very unlikely that these accounts would ever become my oldest ones at any future point before they would age off. My concerns were credit mix in my present credit profile, and age of accounts in the distant future.

Your final cautionary note was right on target: I logged in to these student loan accounts today, and they were listed as Paid in Full. As you say, the costs of years of servicing (even with e-mailed statements) don't justify keeping the accounts open. I am afraid that I was a bit ... giddy when presented with the opportunity of paying this off and I went a bit too far. I was also motivated by the desire to have as little debt as possible for mortgage underwriting purposes ... scoring isn't everything. I think I should have paid each down to $100 or so, or paid one account in full and kept the other open at that level: the effect on mortgage qualification would have been minor and I think significantly outweighed by the chance of a score boost.

Hopefully others will learn from my experience.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 20:31:37 GMT

Wow... thanks for that update. That's really helpful for the rest of us, though sorry for you that you lost the extra years.

I went overboard on my paydown too. I paid mine down to $50, the next day I began to feel like I had been a little too aggressive. I mean the original loan amount wias 41k and my balance at the time was $3500. There was no need for me to cut it THAT close. If I had paid it down to $70 then that would give me enough padding for a $2 push every six months for activity and even after 11 years I'd still be above $51. If I had paid it down to $101 I would have been at > $101 indefinitely (even with the periodic $2 payments).

Re: Should I bother keeping student loan accounts open?

SouthJamaica — Wed, 18 Jan 2017 22:28:54 GMT

@Anonymous wrote:
Thanks for the input.

For me, oldest open account wasn't a factor here; I have open accounts that are a bit older. Also very unlikely that these accounts would ever become my oldest ones at any future point before they would age off. My concerns were credit mix in my present credit profile, and age of accounts in the distant future.

Your final cautionary note was right on target: I logged in to these student loan accounts today, and they were listed as Paid in Full. As you say, the costs of years of servicing (even with e-mailed statements) don't justify keeping the accounts open. I am afraid that I was a bit ... giddy when presented with the opportunity of paying this off and I went a bit too far. I was also motivated by the desire to have as little debt as possible for mortgage underwriting purposes ... scoring isn't everything. I think I should have paid each down to $100 or so, or paid one account in full and kept the other open at that level: the effect on mortgage qualification would have been minor and I think significantly outweighed by the chance of a score boost.

Hopefully others will learn from my experience.

Well look at it this way, it's the easiest 5 bucks you ever earned

In any event, now you can go get yourself an SSL an get those points back.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 18 Jan 2017 22:32:36 GMT

Yup, as SJ says, the SSL has got your name on it now. Go for it.

Re: Should I bother keeping student loan accounts open?

Anonymous — Mon, 23 Jan 2017 04:21:18 GMT

Thank you for the strategy.

My score hasn't dropped just yet; I'm sure I will be more motivated to follow up on this tip once I see it plummet.

I'm curious ... are there known alternatives to Alliant for implementing the savings-secured technique effectively?

Re: Should I bother keeping student loan accounts open?

Anonymous — Mon, 23 Jan 2017 05:05:22 GMT

It is known that CUs do exist that will meet all of the criteria that Alliant meets for this technique:

* Allows you to open a $500 SS loan for a 60 month term

* Funds unlock proportionate to how much you pay off

* Allows you to pay off most of it early on and then keep it open for the full 60 months

* Soft pull only for approval -- no hard pull

There very well might be many such CUs -- and more that meet some of the criteria but not all. (Example, credit union X requires a hard pull, Y requires a minimum loan amount of $1000, Z permits a maximum term of 48 months, etc.)

I haven't seen anyone create even a partial list of these CUs, however, where at least two people have actually taken out the loan and verified a few months later that all those criteria were met. Certainly Alliant is the only one where the degree of step by step hand holding for the process that you seen in the guidance has been documented.

I would be delighted to hear more about alteratives from anyone who wants to do the work on it.

Re: Should I bother keeping student loan accounts open?

Chris679 — Mon, 23 Jan 2017 09:22:27 GMT

@Anonymous wrote:
Thank you for the strategy.

My score hasn't dropped just yet; I'm sure I will be more motivated to follow up on this tip once I see it plummet.

I'm curious ... are there known alternatives to Alliant for implementing the savings-secured technique effectively?

Yes, the alternative is to not throw money away for a loan just to possibly raise your credit score. Do you realize you will be paying interest on your own money? Money that will be tied up in this savings account for years?

Re: Should I bother keeping student loan accounts open?

Anonymous — Mon, 23 Jan 2017 13:53:21 GMT

Well, as described, the interest would be about $9 over 5 years.

Hardly onerous if you intent to utilize your credit, and fit the profile of those likely to see a score boost: a few points' difference could mean savings of thousands or tens of thousands on mortgages or other products.

Of course, if you don't intend to utilize your credit, it's a waste of $9.

Re: Should I bother keeping student loan accounts open?

Anonymous — Mon, 23 Jan 2017 16:28:48 GMT

@Anonymous wrote:
Well, as described, the interest would be about $9 over 5 years.

Hardly onerous if you intent to utilize your credit, and fit the profile of those likely to see a score boost: a few points' difference could mean savings of thousands or tens of thousands on mortgages or other products.

Of course, if you don't intend to utilize your credit, it's a waste of $9.

+1.

PS. And for those people for whom it is recommended, the FICO 8 boost is quite a lot. About 30 points, we typically say, though the median and average might be a bit more, like 32.

Re: Should I bother keeping student loan accounts open?

Anonymous — Sun, 05 Feb 2017 00:55:13 GMT

Postscript:

The two student loan accounts have now been reported as closed, per Experian credit monitoring.

I haven't checked thoroughly but that is likely the only report change from the previous days.

Experian FICO 8 dropped 22 points.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 16 May 2018 22:06:38 GMT

Really helpful forum. Going to contact local CU's to find one that offers this product. Makes sense just to build a relationship with one that I'd want to use anyways. Does anyone know the score boost you'd get if the student loans you pay off include late payments? I have some from 2 years ago and now it's another 5 years until they fall off. But I feel like paying off an account that had latest would be even more of a boost?

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 16 May 2018 23:26:53 GMT

@Anonymous wrote:
Really helpful forum. Going to contact local CU's to find one that offers this product. Makes sense just to build a relationship with one that I'd want to use anyways. Does anyone know the score boost you'd get if the student loans you pay off include late payments? I have some from 2 years ago and now it's another 5 years until they fall off. But I feel like paying off an account that had latest would be even more of a boost?

Can you describe your situation a bit better? Are you saying that you have open student loans right now?

If you have open loans, then the Share Secure Loan Technique is of no value. It was suggested to our OP because the OP unintentionally paid off his SLs.

Re: Should I bother keeping student loan accounts open?

Anonymous — Wed, 16 May 2018 23:32:12 GMT

I know, and I would keep mine... But they have late payments. Isn't it better to ditch those accounts even though they're already 8 years old and get a new loan with zero late payments?