Pay Off or Make Payments?

[mycreditscoreisfair]

Hey All -

I have four student loans with a current combined total of about $1,000. I have been going back and forth as to whether I should continue to make payments each month or just pay them off. The Experian score simulator thinks my score will drop about 10 points if I pay them off.

I defaulted on the loans in 2019, and each loan shows five missed payments (20 missed payments total). I have since recovered and I'm actually paid months ahead at this point. My current plan is to continue paying $100+ a few dollars extra to cover interest each month.

This would pay them off in about 10 months and would show I made an extra 40 on-time payments. I think that would be more beneficial because my credit history shows 13 accounts I missed payments on, all around the same time in 2019. According to Experian, one of the biggest things affecting my credit score is my payment history.

Am I right in thinking it's best to pay them monthly, or would it be better to just pay them off? I have two other installment loans which were opened in the last three months on my credit report. 

[calyx]

Paying them down monthly will keep that credit history a little longer, which is generally good.

Increasing your positive history is always good, but just realize that the ratio of good:bad payments doesn't really matter much (if at all), with such recent derogs.   What you reallly need is for those negatives to age off. 

Honestly? this one is up to you.  As you have other open installment loans, you will still satisfy the requirement to have loans for your credit "mix" - paying it off in a few months extends your history for that line, but it might be easier for you to just get it out of the way.  And don't worry about Experian (or any other) simulator.   They're about as accurate as a magic 8 ball.

The *only* real difference paying it off might make would involve your loan utilization %, which is calculated as an aggregate.    By paying off your SLs, they're removed from the equations and that might increase your utilization of loans and could push the % past a threshhold, but loans don't have the impact of revolvers, so I don't imagine it would be significant (if at all).    The biggest score difference you might see is if the Agg% is under 9% now, and closing the loans pushes it past that.

It sounds like you have a lot of young accounts and recent derogatories;   so paying them off over time will help you in the long run if you are patient.   This is what I would do, but paying off those loans to get them over with would not significantly hurt your credit file or scores.

^ I realize I was not super helpful.  tldr; it's safe to pay them off and totally up to you.   Your derogatories are pretty recent and will hurt your scores for some time to come as long as they're present (more than a few months of positive payment history will help) paying off or keeping the loans active will likely not have a huge impact, but every little bit could help in the long run.

[mycreditscoreisfair]

Thank you for the reply, calyx.

Im glad to hear it probably won't make much difference either way. I kind of lean toward just paying the student loans off to get rid of it. But I just wasn't sure if it would be beneficial or not. It sounds like it'll probably be a push. 

All of my delinquent accounts hit in the middle of 2019. I defaulted on 5 credit cards, 2 personal loans and an auto loan. And I had five accounts in collections at the max.

I've managed to pay off three credit cards in full, and the fourth card is scheduled to be paid in full in January. One personal loan is on a payment plan and the other will be paid off in March. And my last collection will be paid off in February.

My credit score went from 454 to 586 in 2020, so I'm hopeful that these plus adding more lines of credit will help me hit 680 in 2021. But unfortunately with the 2019 issues, a lot of it may come down to time passing once everything is paid in the next few months. 

[ghost-cell]

It depends if you're paying interest, how much that interest is, if you've ever taken out installment loans before, if you plan to take out installment loans soon... It could add to your "credit mix" to have loans mixed with credit cards. If these are your only loans, you do lose a bit of diversity, esp once they fall off your report in 10 years. They say you should never pay money to build credit, which I especially agree with if the interest is high. You also get to stay liquid for longer. I personally drew out paying my interest-free loans as long as possible, taking my time with them. In the end, it had its pros--- they stayed on my credit report longer. Of course, I didn't do it with strategy--- this was before I started learning about credit. It just so happened to have pros for me.

[ccquest]

If you're fine with paying $X in interest over the remaining X term when you don't need to, keep them open and ride the extra benefit of lower installment loan utilization and additional time for it to age. I personally would just pay it off and be done. One less account to worry about and have to keep current if 2019-like situations return for you.

As far as getting to 680 this year, I would continue to aim for that goal but it may not be realistic with the lates being so new and staying for seven years.