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Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

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Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

Before I write any of this please note that I have searched all over for opinions and/or a solid answer but I've come to realize that they rarely exist in the world of credit scoring.

 

I started paying attention to my credit in 2015 when I realized a family member took it upon themselves to use my ssn for virtually everything you could imagine. My starting score if you want to call it that was around 475. Now all three are 715 plus and it was a long and treacherous and stressful and most importantly expensive journey. I realized just how much money was all but literally thrown in the trash because of my credit history (most of which I played no part in destroying) and now know just how much of an impact it can have in being able to live comfortably later in life. Most of what I learned that actually helped came from this forum or from help from family and friends which is why I'm asking this here.

 

The two factors affected my credit score from surpassing the 750 mark are the two that are the hardest to control. My average credit length and inquiries. My average length is 3 years 2 months and my student loans are the oldest accounts. From what I understand, once they are completely paid off they stop contributing to your length after two years of being officially reported as closed, so would it be better for me to leave a ~200.00 balance across all three? They're getting very close to being paid off and I have 120 months left to pay them due to them being on an ICR plan. Same deal with my latest personal loan.

 

Any input is appreciated. Sorry if this all seems like a jumbled mess. I'm not the most educated person on the planet but I like to pretend I'm not a complete moron.

Starting Score : 491 TU Sub 500 EQ EX
Current Scores : 700 TU, 636 EQ, 657 EX
Goal Scores : 775 TU EQ EX


Cap One QS One : 750, Plat. 1000, Amex Everyday 1000, HelpCard (Nautilus) 2500, Kohls 300, Old Navy 500, American Eagle 1000.
Message 1 of 9
8 REPLIES 8
Established Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

There are two different "Average Age" metrics.  You standard FICO 8 doesn't really care about the average age of OPEN accounts, and instead factors the average age of ALL accounts.  If the account is showing up on your credit report, it is contributing to the Average Age regardless of its status as open or closed.  Closed accounts can remain on your credit report for up to 10 years.  You won't want to close out ALL the personal/student loans...  Leave one open with a small balance.  You will get a better score boost that way.

 

The far less popular and less-used by lenders score, Vantage 3.0 (also known as "FAKO" the scores you get with Credit Karma or Credit Sesame) is focused on open accounts, and is where you will see a drop in average age if you close accounts.

 

 

NFCU MR: $25K | Venture: $21K | Amex ED: $18K | NFCU CR: $18K | Amex BCE: $15K | IT #1: $15K | PNC Core: $15K | Wells Fargo: $11K | Savor: 12K | Cap1 QS: $8.5K | Barclays Rewards: $7.75K | IT #2: $6.8K | MLife: $6.5K | Sportsman's Guide: $8.7K | NRA: $5.5K | Elan Plat: $2.3K | Cap1 PS: 2K | TRV: $2.8K | Cabela's: $1K |



 


Current FICO 8 Scores: EQ: 735 | TU: 741 | EX: 733

Message 2 of 9
Super Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

As the other commenter explained, you were mistaken that your closed accounts would stop aging or contributing to your AAoA after two years. 

 

But there are still good reasons for paying your loans down but still keeping them open for as long as you can.  Some lenders (or loan handlers) will permit you to pay a loan down to a fairly small balance -- and then the handler will as a result push the Due Date for the next payment way into the future.  What you should do is contact each of the lenders and ask them how they handle that.  For example, if a student loan was originally for $5000, ask the lender how they'd treat future payments if you paid it down to $200.  If they insist that you'll still have to make the same monthly payment after that (no postponement of the next Due Date) then paying off most of it will cause the loan to get paid off early.

 

The goal should be to do an early paydown of every loan where they will push the next Due Date way into the future. Pay them down to less than 8.9% of the original amount.   Then with your other loans, pay them down as much as you can. The reasons for all this is that FICO likes seeing that you (a) have open loan(s) but (b) you have paid off most of the balance but not all of it.

 

Another nice consequence is that when your closed loans eventually do fall off your reports (typically 10 years after they close) they will be older than they would be had you paid them off abruptly.

Message 3 of 9
Super Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?


@Squirtgunswrote:

Before I write any of this please note that I have searched all over for opinions and/or a solid answer but I've come to realize that they rarely exist in the world of credit scoring.

 

I started paying attention to my credit in 2015 when I realized a family member took it upon themselves to use my ssn for virtually everything you could imagine. My starting score if you want to call it that was around 475. Now all three are 715 plus and it was a long and treacherous and stressful and most importantly expensive journey. I realized just how much money was all but literally thrown in the trash because of my credit history (most of which I played no part in destroying) and now know just how much of an impact it can have in being able to live comfortably later in life. Most of what I learned that actually helped came from this forum or from help from family and friends which is why I'm asking this here.

 

The two factors affected my credit score from surpassing the 750 mark are the two that are the hardest to control. My average credit length and inquiries. My average length is 3 years 2 months and my student loans are the oldest accounts. From what I understand, once they are completely paid off they stop contributing to your length after two years of being officially reported as closed, so would it be better for me to leave a ~200.00 balance across all three? They're getting very close to being paid off and I have 120 months left to pay them due to them being on an ICR plan. Same deal with my latest personal loan.

 

Any input is appreciated. Sorry if this all seems like a jumbled mess. I'm not the most educated person on the planet but I like to pretend I'm not a complete moron.


In terms of your FICO 8 score it's better to leave the nominal balance.

 

It's much less clear how it affects your other scores.

 

 


Total revolving limits 730000 (603500 reporting) FICO 8 scores: EQ 722 TU 764 EX 734
Message 4 of 9
Super Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

Great catch by SouthJ.  FICO 8 really likes it when you pay loans down but not off.  As he says, it's less clear how that works with the other models.  I would love it if we had some clear evidence on how FICO 9 reacts.


What is certain is that this strategy (pay loans down but keep them open as long as you can) never hurts your score, and for the most widely used model (FICO 8) it helps it.

Message 5 of 9
Community Leader
Senior Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

For the record, VantageScore also includes closed accounts in its age stats, but CreditKarma's front-end software omits them.

Message 6 of 9
Super Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

Gotta love that misleading fluff software!  I really think it does more harm than good.

Message 7 of 9
New Visitor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?

I seen this strategy taught on YouTube. I'm wondering if your student loan is from navient if it is you have the option to forward your payments or be charged the next months full pay which would cause you to pay your loan off early. But remember intrest is still growing steadily but it should not be much if you paid down majority of the loan
Message 8 of 9
Super Contributor

Re: Should I pay off the ENTIRE balance on my personal/student loans or leave a small amount?


@Prosper4prosper wrote:
I seen this strategy taught on YouTube. I'm wondering if your student loan is from navient if it is you have the option to forward your payments or be charged the next months full pay which would cause you to pay your loan off early. But remember intrest is still growing steadily but it should not be much if you paid down majority of the loan

Hey Prosper, welcome to the forum.  Just something to keep in mind when posting is to look at the date of the thread you're replying to.  The question asked by the OP was from about a year ago, so chances are he's already made whatever decision he was going to make and the probability of him returning to this thread to answer your question is pretty small. 

Message 9 of 9
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