Paying off student loans and credit score

Anonymous · ‎02-08-2018

Background: I defaulted on my 6 USDeptEd student loans in 2014 with Nelnet, totaling ~22k. The loans were opened 2010-2012. Early 2017, I decided to get my life back on track, and signed up for loan rehabilitation. My starting fico8 credit score was around 520 on all three credit agencies. 9 months later, (November 2017), Nelnet took up my loans, the 6k in service fees was dropped, and my fico8 jumped to ~690 by the beginning of January. To avoid paying interest, I payed each loan down over the past two months down to about 200 dollars each (around $1,200 total loan debt). I have one paid collection account through Enhanced Recovery for an old ATT bill from early 2013. I made the mistake of paying them last year, without reading up. HUGE mistake, as I can't get the collection account removed or "goodwilled" off my reports.

Today: I'm floating around fico8 score of 710, have 1% revolving credit utilization, have no auto loans, have 3 credit cards opened originally around 2009, and paying the minimum payment each month on the leftover school loans hoping leaving these rehabilitated accounts open will help my score. I'd like to buy a house around Oct-Dec this year.

So, questions:

1. Should I just pay off the 6 rehabilitated loans, or milk the low payments? I didn't completely pay them off right away as I wanted the rehabilitated trade lines to show up on my report. The current interest being accrued is trivial to me.

2. If I pay off the loans, will this hurt my credit score be it there are no other open installment loans on my credit?

3. Will having low-balance student loans open and in good standing help my chances of getting approved on a mortgage, or is it better to just pay them off just before applying for a mortgage?

Note: have written good will adjustments to US Dept. Ed to try to get adjustments to the original 120+ day late marks on the original tradelines.

Any suggestions would be great.

Anonymous · ‎02-08-2018

The six loan payments will affect something called DTI. This has nothing to do with your credit score. It is something else entirely. If your DTI is low enough, counting all six loan payments, then my tendency would be to keep them all open even through final underwriting, though your loan officer can tell you whether his lender would like it better if you paid off some of them.

What is certain (in my opinion) is all of the following:

(1) There is no reason to pay off any of them now (eight months before the home purchase). Keep them all open for a while longer and continue extending a history of perfect payments since 2017 on each one.

(2) Do not pay ALL of them off, under any circumstances, even if your loan officer tells you that it will help your score. Paying off all the loans would be a bad idea.

(3) If you do choose to pay off one or more, choose to pay off the loans that had the smallest original loan amounts. For example, suppose your loan amounts were $1800, $2200, $3000, $4000, $5000, $6000. You would not want to keep the $1800 loan open but pay off the others. Rather, you'd keep open the big loans (since each loan currently has a $200 balance) and pay off the smaller ones. Keeping open exactly one loan should in theory be fine.

These student loans are your only installment accounts, right? No auto leases, no furniture payment plans, no loans of any other kind?

At some point soon you should pull your FICO mortgage scores, which are different from your FICO 8 scores. If you think you stand a decent chance of getting your severest latest removed, you may want to delay pulling those, since pulling your mortgage scores costs money. You can buy them here at myFICO.

SouthJamaica · ‎02-09-2018

wrote:
Background: I defaulted on my 6 USDeptEd student loans in 2014 with Nelnet, totaling ~22k. The loans were opened 2010-2012. Early 2017, I decided to get my life back on track, and signed up for loan rehabilitation. My starting fico8 credit score was around 520 on all three credit agencies. 9 months later, (November 2017), Nelnet took up my loans, the 6k in service fees was dropped, and my fico8 jumped to ~690 by the beginning of January. To avoid paying interest, I payed each loan down over the past two months down to about 200 dollars each (around $1,200 total loan debt). I have one paid collection account through Enhanced Recovery for an old ATT bill from early 2013. I made the mistake of paying them last year, without reading up. HUGE mistake, as I can't get the collection account removed or "goodwilled" off my reports.

Today: I'm floating around fico8 score of 710, have 1% revolving credit utilization, have no auto loans, have 3 credit cards opened originally around 2009, and paying the minimum payment each month on the leftover school loans hoping leaving these rehabilitated accounts open will help my score. I'd like to buy a house around Oct-Dec this year.

So, questions:
1. Should I just pay off the 6 rehabilitated loans, or milk the low payments? I didn't completely pay them off right away as I wanted the rehabilitated trade lines to show up on my report. The current interest being accrued is trivial to me.

Keep them open, not for the small payments but for the score boost.

2. If I pay off the loans, will this hurt my credit score be it there are no other open installment loans on my credit?

Yes

3. Will having low-balance student loans open and in good standing help my chances of getting approved on a mortgage,

Yes

or is it better to just pay them off just before applying for a mortgage?

No

Note: have written good will adjustments to US Dept. Ed to try to get adjustments to the original 120+ day late marks on the original tradelines.

Any suggestions would be great.