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Student Loans & Credit History Age

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Anonymous
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Student Loans & Credit History Age

I have been searching for weeks for some answers and have come up empty handed in my searches for my specific situation. I have a healthy mix of credit - 2 credit cards, 1 car loan, 2 student loans. I recently got the opportunity to go back to school and be reimbursed by my work once I pass the courses, but at the moment cannot pay for the classes straight up this semester. I have qualified and have received a new federal student loan. My question is with the average age of your credit having an effect on your score, what will be the effects if any and how bad would it be if I pay off the student loan as soon as I get reimbursed at the end of the semester. From my searching it appears that it shouldn't have a huge effect since I already have a diverse credit, but I cannot find a definitive answer anywhere. Any advice or insight would be greatly appreciated.
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Anonymous
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Re: Student Loans & Credit History Age

Credit Mix is not the only set of factors at play in this decision.  There is another bigger part of your score called Amounts Owed.

 

Within Amounts Owed there is a factor that looks at your open loans and computes the extent to which they are mostly paid off, partly paid off, or not paid off.  People here call this "Installment Utilization" or Balance/Loan Ratio.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

 

What you need to do is project how much you think you will owe on all your loans at the time of payoff.  Then compute your Installment U just before the payoff.  Then assume you payoff the loan.  That loan is now closed and will no longer count toward your IU.  So compute your IU again based on excluding that loan.

 

If your IU goes up a lot, it will hurt your score in the FICO 8 model. 

 

Here is an example of how that would work.  Bob has two loans: an auto loan for 49k and a personal loan for 1k.  He owes 2k on the auto loan and 1k on the personal loan (personal loan is new).  His IU is (2 + 1) / (49 + 1) = 3 / 50 = 6%.

 

He then pays off the auto loan.  His IU is now 1/1 = 100% (the auto loan is closed and no longer counts).

 

He will see a drop in his FICO 8 score by 30 points or so.

 

Until you crunch the numbers you cannot predict whether your IU will go up or down or stay the same by this proposed payoff.

 

One possible strategy would be to keep all your loans open but pay the amounts you owe DOWN.  This is guaranteed to not hurt your score and probably help it. 

 

Let me know if this makes sense.

Message 2 of 5
Anonymous
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Re: Student Loans & Credit History Age

This makes a lot of sense actually as far as calculating my Installment Utilization and will use this more in the future. I figured out it's pretty much better if I just pay if off as soon as I get reimbursed, i'm guessing my score will drop temporarely while the loan is on it for a month or two and then go back up once I pay it off after crunching the numbers. My real confusion is coming from the credit age history and how that impacts my score. Is credit age history just taking into account your Credit and Installment Utilization? My root question was really if I have a loan on my credit report for a few months if that would greatly impact more score if at all when I pay it off not so much the total utilization aspect.  Thanks in advance for the assistance.

Message 3 of 5
Anonymous
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Re: Student Loans & Credit History Age

The new loan will affect two age-related scoring factors when it first appears....

      * AAoA (Average Age of Accounts)

      * AoYA (Age of Youngest Account)

 

as well probably a hard inquiry.

 

These three things will harm your score, but that harm won't be made any worse four months later (say) by closing the account early.  The closed account will continue to age and will continue to count as part of your AAoA.

 

There are other scoring factors besides age-related ones, however.  I mentioned the one that will have an impact for an early closure, which is Installment Util.  You can compute what your IU will be shortly before and after the closure, and that will enable be able people here to guess whether your FICO 8 score will go up or down and by how much.

 

You write "I figured out it's pretty much better if I just pay if off as soon as I get reimbursed." 

 

If you feel like expanding on that, it would be interesting to hear more.  Better off how?  The two ways I can think of are: better for my score and better for my finances.  Paying it off early is not best for your score (a better strategy is to pay loans down while keeping them all open).  Paying it off early is best for your finances if you have no CC debt you are paying interest on and of your loans it is your highest interest loan.  If not it may be better to clear high interest debt first.


Anyway, I hope you have your questions answered and feel empowered to make the best decision for you.

 

Message 4 of 5
Anonymous
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Re: Student Loans & Credit History Age

You have been a massive help with all of your answers so far, since every credit situation is different and I haven't been able to find my exact scenario. Since it's a federal loan it actually wont have a hard inquiry luckily, but it will have an impact on my AAoA and my AoYA. I computed the IU and it will definetly go down in a positive way when paying it off, so as far as that aspect is concerned it will benefit me. I guess I was wondering if there was anyway to calculate what sort of impact the AAoA and the AoYA would have on my account, or if it's only really the difference of a few points. As far as I can tell besides that it will be best for me not only for my score, but also for my finances. Most likely this account would only be on my account for 3-5 months depending on how long it takes to reflect on my report after payoff.

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