Paying off student loans and credit score

SomeGuyOnTheWeb · ‎02-20-2014

Currently, I have 8 different student loans totaling about $23,000.

Does anyone know how paying off a student loans affects your FICO score? I know this is a generic question, but everywhere I look I seem to get rather vague answers. Some places says it lowers your score by lowering your AAoA, while other places I've looked says it would raise your score by lowering your total outstanding debt. I ask because I'm thinking about completely paying off the smallest two loans ($500 and $1,200) while I have the money, but before I do I'm curious as to how it would affect my credit score. I'm trying to save up for a new car here in the future, so I'm not trying to do too much that would prevent me from getting a good interest rate.

EQ - 727
TU - 752
EX - 774

Anonymous · ‎02-20-2014

I'm no expert on student loans. However, a couple of comments.

1. Paying off a loan should not affect your AAoA immediately, because closed accounts contribute to your AAoA for a period of years.

2. Student loans are installment debt, and paying off installment debt typically doesn't do much for your scores. FICO scoring is more concerned with revolving utilization.

3. Paying off any sort of loan may help your DTI, and this is important in qualifying for credit.

youdontkillmoney · ‎04-26-2014

@Anonymous wrote:
Paying off student debts should be the same as your other debts - live below your means for a while. The first step should be getting rid of credit cards. Then try and cutting out whatever expenses you have and don't need, or at least minimize expenses. Check out insurance costs especially auto. They are massive drains. Once you finally get your spending under control, you'll realize that you can start paying off your debt FAST.

^^^

This is good advice. generally pay off your higher interest debt first, usually they are credit card type loans. Student loans, not all, tend to have lower interest rates and more options for deferment. Pay these off last. I have a 819 FICO and I always pay off debt when I can. So if you can pay something off, go ahead and do it.

takeshi74 · ‎04-26-2014

@SomeGuyOnTheWeb wrote:
I ask because I'm thinking about completely paying off the smallest two loans ($500 and $1,200) while I have the money, but before I do I'm curious as to how it would affect my credit score.

You'd see more of an effect on your score by applying the $1,700 to revolving debt.

@SomeGuyOnTheWeb wrote:
Some places says it lowers your score by lowering your AAoA,

You always have to consider the source, validate and corroborate. As indicated above, closed accounts in good standing continue to report for 10 years and, therefore, do not impact AAoA. See also:

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

Which links to:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Calculating-Average-Account-Age/m-p/13256...

@SomeGuyOnTheWeb wrote:
I'm trying to save up for a new car here in the future, so I'm not trying to do too much that would prevent me from getting a good interest rate.

Paying off those student loans wouldn't prevent you from getting a good interest rate but you might be in better shape if you applied the funds elsewhere as described above. Calculate your current utilization and then calculate what it would be after paying down your revolving balances by $1,700.