Should I bother keeping student loan accounts open?

[Anonymous]

I recently had the opportunity to pay off two small student loans.

On a hunch, I decided that it might be better for credit purposes not to pay off the account in full. These are my only open installment loans.

I left a balance of about $5 on each, and no payments are due for several years.

I understand that keeping the accounts open a bit longer will be beneficial in the long run because the accounts should remain on record for 10 years from the date of last activity.

Would my FICO take a hit in the short term if these only installment accounts were paid in full and closed?

[SouthJamaica]

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@Anonymous wrote:

I recently had the opportunity to pay off two small student loans.

On a hunch, I decided that it might be better for credit purposes not to pay off the account in full. These are my only open installment loans.

I left a balance of about $5 on each, and no payments are due for several years.

I understand that keeping the accounts open a bit longer will be beneficial in the long run because the accounts should remain on record for 10 years from the date of last activity.

Would my FICO take a hit in the short term if these only installment accounts were paid in full and closed?

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On a short term basis, your FICO 8 score will lose points because you will have no open installment loans. Right now you are getting points for having a low balance against a high original loan amount. So from a pure scoring perspective, yes keeping them open with minimal balance is cool.

Me, I get nervous about keeping things open. What if I forget about the $5 balance, or if something happened to me, etc.

If you would like to get something new to take the place of the student loans, which is quite painless, you could do this:

Join Alliant Credit Union, take out a $500+ savings account, take out a $500 share secured loan secured by the savings account with a 48 or 60 month term, decline or cancel autopay, transfer $455 from the savings account towards the loan balance bringing the balance down to $45. Pay that off slowly over the balance of the term.

Once it reports you'll be safer to close out the student loans in terms of scoring. That will cushion the scoring blow of closing the loans.

As I see it, the only negative from your perspective is that you'll be having a new account, which might cost you a tiny bit in scoring, but there's no hard pull.

[Anonymous]

I made the same choice as you a year ago -- to pay down my student loans to a low amount and extend the next payment due for a long time.

I'm curious: how old are your SLs now, and how old will they be when you make the next (and presumably last) payment?

The penalty for going from where you are now (total open installment debt paid way down but stiil open) to no open loans of any kind is about 30 points for FICO 8.

The path SouthJ suggests is fine too.  (The Alliant Share Secure Loan.)  You can read about it here.  All you need to do is read the first few posts in the thread:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

[Anonymous]

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@Anonymous wrote:

I made the same choice as you a year ago -- to pay down my student loans to a low amount and extend the next payment due for a long time.

I'm curious: how old are your SLs now, and how old will they be when you make the next (and presumably last) payment?

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Also curious about one other thing.  Are your student loans your oldest open accounts?

Mine were, which is yet another reason I opted to keep them open for as long as I could.  "Age of oldest account" is one of the three factors that determine which scorecard you get placed in, for clean profiles anyway.  

[Anonymous]

>> Me, I get nervous about keeping things open. What if I forget about the $5 balance, or if something happened to me, etc.

Sometimes I think we're all on this forum because we've learned a lesson of this sort the hard way.

[Anonymous]

The accounts are only about two years old at present, but they would be 10 years old at maturity.  Having them on record for an extra 10 years, as > 10 year old accounts, would probably be a positive contribution to my average age of accounts based on my profile and assuming I open new accounts in the intervening time.

[Anonymous]

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@Anonymous wrote:

The accounts are only about two years old at present, but they would be 10 years old at maturity.  Having them on record for an extra 10 years, as > 10 year old accounts, would probably be a positive contribution to my average age of accounts based on my profile and assuming I open new accounts in the intervening time.

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I agree with you 100%.  That's why I made the same decision is you appear to be leaning toward.

You haven't mentioned, however, whether these are your oldest open accounts.  For example, do you have a credit card that was opened earlier than these student loans?

The reason I ask is that there is a different scoring factor from AAoA (Average Age of Accounts) and this is Age of Oldest Account.  If these are your oldest open accounts, then you will be helping that factor too, way down the road, and that's an important factor, since it is used in scorecard assignment.

My student loan was also my oldest open account, so it made the decision to keep it open another 10 years a total slam dunk.

Final note to anyone contemplating doing what our OP has done, i.e. paying a loan amount down to an extremely small balance and then keeping the loan open.  If the dollar value is incredibly tiny (e.g. the $5 our OP has) then some lenders may choose to close out the account entirely after a year or two of no activity rather than keep it open (the overhead is just not worth getting the $5 from you 10 years from now).  I had a very friendly loan expert at the loan servicer for my SL when I was making this decision, and she talked to me quite frankly about this.  I think her recommendation was to keep $30 in an account like this -- based on the internal policies at her institution -- if I wanted to have no risk of early closure.

Of course, our OP may well have no problem.  It's just that is possible to have an early closure when the amount is that tiny.

[Anonymous]

Thanks for the input.

For me, oldest open account wasn't a factor here; I have open accounts that are a bit older.  Also very unlikely that these accounts would ever become my oldest ones at any future point before they would age off.  My concerns were credit mix in my present credit profile, and age of accounts in the distant future.

Your final cautionary note was right on target: I logged in to these student loan accounts today, and they were listed as Paid in Full. As you say, the costs of years of servicing (even with e-mailed statements) don't justify keeping the accounts open.  I am afraid that I was a bit ... giddy when presented with the opportunity of paying this off and I went a bit too far.  I was also motivated by the desire to have as little debt as possible for mortgage underwriting purposes ... scoring isn't everything.  I think I should have paid each down to $100 or so, or paid one account in full and kept the other open at that level: the effect on mortgage qualification would have been minor and I think significantly outweighed by the chance of a score boost.

Hopefully others will learn from my experience.

[Anonymous]

Wow... thanks for that update.  That's really helpful for the rest of us, though sorry for you that you lost the extra years.

I went overboard on my paydown too.  I paid mine down to $50, the next day I began to feel like I had been a little too aggressive.  I mean the original loan amount wias 41k and my balance at the time was $3500.  There was no need for me to cut it THAT close.  If I had paid it down to $70 then that would give me enough padding for a $2 push every six months for activity and even after 11 years I'd still be above $51.  If I had paid it down to $101 I would have been at > $101 indefinitely (even with the periodic $2 payments).

[SouthJamaica]

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@Anonymous wrote:

Thanks for the input.

For me, oldest open account wasn't a factor here; I have open accounts that are a bit older.  Also very unlikely that these accounts would ever become my oldest ones at any future point before they would age off.  My concerns were credit mix in my present credit profile, and age of accounts in the distant future.

Your final cautionary note was right on target: I logged in to these student loan accounts today, and they were listed as Paid in Full. As you say, the costs of years of servicing (even with e-mailed statements) don't justify keeping the accounts open.  I am afraid that I was a bit ... giddy when presented with the opportunity of paying this off and I went a bit too far.  I was also motivated by the desire to have as little debt as possible for mortgage underwriting purposes ... scoring isn't everything.  I think I should have paid each down to $100 or so, or paid one account in full and kept the other open at that level: the effect on mortgage qualification would have been minor and I think significantly outweighed by the chance of a score boost.

Hopefully others will learn from my experience.

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Well look at it this way, it's the easiest 5 bucks you ever earned

In any event, now you can go get yourself an SSL an get those points back.