topic Re: Does Paying Off Students Loans Boost Credit Score? in Understanding FICO® Scoring

Does Paying Off Students Loans Boost Credit Score?

Anonymous — Sun, 17 Mar 2013 22:01:40 GMT

So whenever I got a new card, there'd be a piece of mail sent to me telling me things that adversely affected my credit score. One of the things that come up that I'm not sure about is high debt to credit limit ratio or something like that. I'm sure they don't mean my credit card debt which is like 4% of my total limit. Do they mean my student loans?

They're deferred until 2016 and subsidized so I took them out to invest with, but are they negatively affecting my credit card applications? I can pay them off in full right now. Is it worth doing so before I apply for higher tier cards like CSP or request a big credit limit increase (3x Amex CLI)?

Edit: Title

Re: Does Paying Off Students Loans Boost Credit Score?

FocusedAndDetermined — Sun, 17 Mar 2013 22:22:22 GMT

Debt reduction is always a good thing.

If you have the means why not just pay them off, since interest will accrue even while deferred? If your investments are earning more than you are paying in interest, you may want to pay over time rather than all at once. You are the best judge of your financial picture.

Re: Does Paying Off Students Loans Boost Credit Score?

GoldenloveNY — Sun, 17 Mar 2013 22:31:16 GMT

Trust me, as a college student myself, if you can make a payment to your student loans (whatever the amount), do it! Don't pull if off. Of course, if you can't, then it's okay, but really try to reduce your debt any how you can.

Re: Does Paying Off Students Loans Boost Credit Score?

andre181 — Sun, 17 Mar 2013 22:35:33 GMT

@FocusedAndDetermined wrote:
Debt reduction is always a good thing.

If you have the means why not just pay them off, since interest will accrue even while deferred? If your investments are earning more than you are paying in interest, you may want to pay over time rather than all at once. You are the best judge of your financial picture.

Subsidized means the Federal government is paying the interest. The OP has no obligation to pay the interest while they are in school or in period of deferment.

Re: Does Paying Off Students Loans Boost Credit Score?

FocusedAndDetermined — Sun, 17 Mar 2013 22:42:45 GMT

@andre181 wrote:
@FocusedAndDetermined wrote:
Debt reduction is always a good thing.

If you have the means why not just pay them off, since interest will accrue even while deferred? If your investments are earning more than you are paying in interest, you may want to pay over time rather than all at once. You are the best judge of your financial picture.
Subsidized means the Federal government is paying the interest. The OP has no obligation to pay the interest while they are in school or in period of deferment.

Correct - overlooked that detail.

Re: Does Paying Off Students Loans Boost Credit Score?

Anonymous — Sun, 17 Mar 2013 22:53:30 GMT

@FocusedAndDetermined wrote:
Debt reduction is always a good thing.

If you have the means why not just pay them off, since interest will accrue even while deferred? If your investments are earning more than you are paying in interest, you may want to pay over time rather than all at once. You are the best judge of your financial picture.

Thanks for your input. Ignoring the interest and investment thing, would you say having a student loan balance is why they keep saying my total debt to limit is too high?

Re: Does Paying Off Students Loans Boost Credit Score?

FocusedAndDetermined — Sun, 17 Mar 2013 23:03:34 GMT

@Anonymous wrote:
@FocusedAndDetermined wrote:
Debt reduction is always a good thing.

If you have the means why not just pay them off, since interest will accrue even while deferred? If your investments are earning more than you are paying in interest, you may want to pay over time rather than all at once. You are the best judge of your financial picture.

Thanks for your input. Ignoring the interest and investment thing, would you say having a student loan balance is why they keep saying my total debt to limit is too high?

That would be my guess, since you state your utilization is around 4%. You can wait for a response from a more seasoned expert, but I have the same notation on my reports, and my utilization is at or below yours. My installment loans are the only accounts with "high balances", but are way down from starting point. I pay well above the required amount.

Re: Does Paying Off Students Loans Boost Credit Score?

Cdnewmanpac — Sun, 17 Mar 2013 23:40:03 GMT

1. This should probably be in the understanding scores forum, where the true fico nerds hang out.
2. Most issuers have their computers set to generate 3 or 4 of these reason codes. It is unlikely that all 3 or 4 were actual factors in a decision. If you don't have negatives, these can be comically obtuse. But the computer has to print something, so you get reasons like yours. I wouldn't worry.
3. By and large, card issuers ignore student loans (unless they are delinquent). When I paid off my undergrad loans, there was zero effect on my score and when the originals fell off my report, my score actually went down. If you have a few cards, use them well and in a year, that will really be the only thing issuers pay attention to. Pay off your loans at the pace that makes the most sense financially.

Re: Does Paying Off Students Loans Boost Credit Score?

SnackTrader — Mon, 18 Mar 2013 02:38:34 GMT

So, my situation was very similar to yours when I started applying for credit cards, and I found that my loan balances actually were holding me back.

See, on your credit report, your loans are reporting at their credit limit because you have made no payments on them. Credit scoring doesn't seem to understand the nature of deferment, so it appears that you are basically a degenerate borrower. It was my assumption that my credit score was being hit by this. For example, I had I subsidized loans that were reporting a balance of over $16,000 and an original credit amount of $15,000. I was being dinged for that it seemed. I also had subsidized loans reporting a balance of $5,000 and an original amount of $5,000. Once I paid ALL of the loans down to about 80% of their original amount, I was approved for 3 great cards at great limits.

However, I can't guarantee that all of this was correlated. But I stopped getting the "loan balances are too high" message. So it must have done something.

My advice to you is to not worry about any of it too much for the time being. Use your funds for more important things, and only pay down your student debt when you are ready to do so and after you leave school. Obviously, you want to save on interest charges, so the sooner they are gone the better. But if you are still in school, you will just have to deal with the consequences of how credit scoring interprets your loan balances.

Good luck!

Re: Does Paying Off Students Loans Boost Credit Score?

youngandcreditwrthy — Mon, 18 Mar 2013 03:11:49 GMT

They don't affect your score too much. Id say your aaoa is affected more than anything...
I am pretty sure , however... That it is absolutely ILLEGAL to invest with student loan proceeds...

Be careful.

Re: Does Paying Off Students Loans Boost Credit Score?

Anonymous — Mon, 18 Mar 2013 04:43:31 GMT

Don't worry, technically the loans themselves aren't being invested in anything other than my education. I should've said I took them out to free up other, investable funds, which is more accurate.

Re: Does Paying Off Students Loans Boost Credit Score?

youngandcreditwrthy — Mon, 18 Mar 2013 04:44:27 GMT

That is more accurate :-)
Good job,
Technically, that is my position as well

Re: Does Paying Off Students Loans Boost Credit Score?

Anonymous — Mon, 18 Mar 2013 05:00:24 GMT

@Anonymous wrote:
So whenever I got a new card, there'd be a piece of mail sent to me telling me things that adversely affected my credit score. One of the things that come up that I'm not sure about is high debt to credit limit ratio or something like that. I'm sure they don't mean my credit card debt which is like 4% of my total limit. Do they mean my student loans?

They're deferred until 2016 and subsidized so I took them out to invest with, but are they negatively affecting my credit card applications? I can pay them off in full right now. Is it worth doing so before I apply for higher tier cards like CSP or request a big credit limit increase (3x Amex CLI)?

Edit: Title

I used to get that same message even though my utilization is 1-5%. It was the only reason Amex gave for denying my CLI requests. Well my student loans were paid off last month so I will see if I finally get it. I applied for a credit card last week and didn't get the message so I think that's what it is. No change in score though after the loans were listed as closed.

Re: Does Paying Off Students Loans Boost Credit Score?

jsucool76 — Mon, 18 Mar 2013 05:18:16 GMT

It is usually talking about loan balances is too high compared to loan amounts..

IE :a loan that is deferred (student loans) will have a 1000$ balance on a 1000$ loan for months and/or years. So while it says "paying as agreed" the balance never decreases unless you make a payment. Doesn't exactly look great, but could prob be explained in a recon.

Re: Does Paying Off Students Loans Boost Credit Score?

swpopham — Mon, 18 Mar 2013 12:09:51 GMT

my wifes fico score dropped from 789- to 750 when her student loan paid off. FICO said lack of installment loan account (diversified account missing) or some crap like that. she has the house and credit cards reporting. The installment (ie. car loans, boat etc) is in my name

Re: Does Paying Off Students Loans Boost Credit Score?

Anonymous — Mon, 18 Mar 2013 12:16:15 GMT

It depends on what your score is at. If your score is in 600s, paying it off will most likely help.

Re: Does Paying Off Students Loans Boost Credit Score?

SnackTrader — Mon, 18 Mar 2013 22:34:51 GMT

I don't recommend paying it off as much as paying it down. YMMV in any situation, but the biggest issue of student loans is the deferment period, so paying down to about 75% or so will eliminate that problem, but still keep an installment account open on the report.

Re: Does Paying Off Students Loans Boost Credit Score?

youngandcreditwrthy — Mon, 18 Mar 2013 22:39:37 GMT

I actually make small payments on mine when I can.. say $25 - 50 bucks here and there.

Im prob going to have like nearly $50k when I graduate. In all honest, I feel pretty comfortable with that debt and confident in my ability to repay it. The interest rates are super low, and the investment in yourself is unbeatable! Mine are all Federal Loans, so they will be even easier to manage.