Student Loan Payoff Credit Score Concern

[Dolcetto]

I presently have an approximately $10,000 student loan (direct loan) at about 4% APR.

Aside from this loan I am debt-free. I pay my credit cards in full every month, max out my 401k and Roth IRA, and have my savings in CDs paying on average 5% APY. Financially I am on a good path.

I have plenty of cash to pay off the $10,000 student loan and want to because the 1% difference between what I would earn in a CD and the loan's interest isn't worth the time and energy I spend managing this account. I value simplicity.

The only hesitation I have is that this student loan is my only installment loan and I am concerned about the impact on my credit score. When I paid off another $10,000 student loan a few months ago my score dropped 20 points and is now right around 800.

I am concerned about my credit score for two reasons: (1) I may want to get a mortgage in a few years, and (2) I may soon live in a state that allows credit score to be considered when rating insurance.

Does anyone have insight into how paying off this student loan, my only installment loan, might impact my score? Can a credit profile with a history of installment loans but where the only open accounts are credit cards have a score over 800?

[cmr79]

My credit score did not change at all in the last few months after my student loans (>10X yours) were forgiven through PSLF. Granted, I still have a mortgage that is larger than the student loans were, so the lack of effect on my situation might not directly compare.

Usually rates based on credit scores are tiered, so any impact on your credit score would matter a lot more if you had a lower score closer to a break point, I would imagine. With a relatively high credit score and likely a low impact if any from paying off a small installment loan, I would be surprised if this had a significant impact on your eventual mortgage or insurance rates. If you value simplicity enough to not want to continue to try to rate arbitrage between your investments and loan interest rate, perhaps you also would value simplicity above credit score impact with possible secondary effects on rates?

[pizzy]

Never let a perceived impact to your credit score stop you (or delay you) from paying off debt.

[retired@50]

I pay my credit cards in full every month

This ^^^ will be enough to drive your credit score higher.

I agree with pizzy, above. Pay off the debt.

Regards,

[Fess McGee]

Credit scores as an indicator of people's ability to handle credit are a scam. My credit score is lower because I have so much money that I don't need to use credit? OK. Whatever.

[CaptainT]

When I paid mine off it lowered my score by less then 10 points and rebounded in less then 3 months.
However you will have less debt which means you will have a better debt to income ratio and will be better able to qualify for good mortgage rates if paid off.
Do it , pay the debt off today and give yourself a pat on the back

[Onlineid3089]

Let's say it did the absolute worst case scenario and dropped it another 20 points and never recovered, which I expect would be overly dramatic for both. What practical difference is there between your current 800 score and a 780? Mine is over 800 so I don't really pay any attention to this, but isn't 760 generally considered to be all you need to get the best rates?

[rocket354]

I am concerned about my credit score for two reasons: (1) I may want to get a mortgage in a few years, and (2) I may soon live in a state that allows credit score to be considered when rating insurance.

Any impact to credit scores for paying off debt is very short-term and not very big. Therefore, paying it off shouldn't affect concern (1) at all, and likely won't affect concern (2). As well, most agencies that are concerned with credit score have a top tier that starts around 760. Therefore, (2) is unlikely to be affected no matter what--it would require your score to drop another 40 points, which is very unlikely to be caused by paying off $10k of student loans.

(In all honesty, I'm surprised the first tranche caused a drop. Are you sure nothing else was going on at the same time that may have caused a drop?)

[Do_Nothing]

It's been several years, but when I paid off mine I recall my credit score dropping around 30 points. I was more amused than annoyed. It bounced back within 6-12 months if I remember correctly. I think the same thing happened when I paid off a car. I don't have any debt and only active credit cards on my report, so it was likely the resulting lack of credit diversity that got me similar to your situation.

Don't worry about it.

[Tom_T]

Credit score isn't a permanent number. It's always changing. I wouldn't think twice about paying off a student loan. You'll have other opportunities to take on debt.

[VoiceOfReason]

Don’t let the tail wag the dog. Pay off the debt. Like many people on this site, your credit score will be meaningless before you know it.

[bd7]

Does anyone have insight into how paying off this student loan, my only installment loan, might impact my score? Can a credit profile with a history of installment loans but where the only open accounts are credit cards have a score over 800?

Yes, it will impact your score. Yes, it is possible to have a score over 800 with no current installment loans if you have a long enough credit history, but it will be much easier if you retain the student loan. Given that your student loans are presumably tax deductible and the rate is low enough that you can actually make a net profit with CDs, I would highly recommend that you not pay it off and instead just pay the absolute minimum to extend the loan as long as possible. You can always pay it off later after you acquire a mortgage. I'm not sure what you mean by "time and energy managing this account". Just set it up for autopay and forget about it forever.

Having a super-high credit score may not matter to some people, but it does have its advantages. It's easy to say "don't worry about your credit score" when you are someone who doesn't need to worry about their credit score (like me). Given that you are young enough to still have student loans and that you don't own a house yet, you are definitely someone who should care a lot about their FICO. b/t/w, make sure you are looking at the FICO 8 credit card score available from multiple credit cards (Discover, Wells Fargo, etc) and not some other dubious score.

[Dolcetto]

Credit scores as an indicator of people's ability to handle credit are a scam. My credit score is lower because I have so much money that I don't need to use credit? OK. Whatever.

I agree with you that the models aren't a fair measure of creditworthiness today (maybe in the 1980s they were), but the reality is that lenders use it so I care about it.

[Dolcetto]

Let's say it did the absolute worst case scenario and dropped it another 20 points and never recovered, which I expect would be overly dramatic for both. What practical difference is there between your current 800 score and a 780? Mine is over 800 so I don't really pay any attention to this, but isn't 760 generally considered to be all you need to get the best rates?

On the free online scores I get various place (credit card company, Credit Karma, etc.) I've sometimes seen > 800 noted as exceptional, while 760 - 799 noted as only "very good." If that accurately reflects how some lenders group scores I want to maintain mine over 800.

[Dolcetto]

Does anyone have insight into how paying off this student loan, my only installment loan, might impact my score? Can a credit profile with a history of installment loans but where the only open accounts are credit cards have a score over 800?

Yes, it will impact your score. Yes, it is possible to have a score over 800 with no current installment loans if you have a long enough credit history, but it will be much easier if you retain the student loan. Given that your student loans are presumably tax deductible and the rate is low enough that you can actually make a net profit with CDs, I would highly recommend that you not pay it off and instead just pay the absolute minimum to extend the loan as long as possible. You can always pay it off later after you acquire a mortgage. I'm not sure what you mean by "time and energy managing this account". Just set it up for autopay and forget about it forever.

Having a super-high credit score may not matter to some people, but it does have its advantages. It's easy to say "don't worry about your credit score" when you are someone who doesn't need to worry about their credit score (like me). Given that you are young enough to still have student loans and that you don't own a house yet, you are definitely someone who should care a lot about their FICO. b/t/w, make sure you are looking at the FICO 8 credit card score available from multiple credit cards (Discover, Wells Fargo, etc) and not some other dubious score.

Thank you for this detailed comment.

My income is too high for student loan interest to be tax deductible. Given the rate on the student loan and current rates on CDs, I would net about 1%.

I'm a minimalist in all things, including my finances. I'm generally averse to having more "things" than I need and in finance that means accounts at different institutions. This student loan account is one more account get emails about, one more account to enter into my financial planning spreadsheet quarterly, and one more auto debit from my checking. I have all of my finances at Ally (banking), Chase (credit cards), Vanguard (Roth IRA), and Fidelity (401k). Nelnet is one more institution to deal with that I don't want to.

And, yeah, I agree that credit scores (no matter how dubious the models) are important, especially at the point I am in life, because they can have a meaningful impact on mortgage rates. And, yes, I am talking about old-school FICO 8. My FICO 8 from Experian is currently 796.

[Dolcetto]

I am concerned about my credit score for two reasons: (1) I may want to get a mortgage in a few years, and (2) I may soon live in a state that allows credit score to be considered when rating insurance.

Any impact to credit scores for paying off debt is very short-term and not very big. Therefore, paying it off shouldn't affect concern (1) at all, and likely won't affect concern (2). As well, most agencies that are concerned with credit score have a top tier that starts around 760. Therefore, (2) is unlikely to be affected no matter what--it would require your score to drop another 40 points, which is very unlikely to be caused by paying off $10k of student loans.

(In all honesty, I'm surprised the first tranche caused a drop. Are you sure nothing else was going on at the same time that may have caused a drop?)

Nope, nothing changed that month except the student loan payoff.

[LotsaGray]

Let's say it did the absolute worst case scenario and dropped it another 20 points and never recovered, which I expect would be overly dramatic for both. What practical difference is there between your current 800 score and a 780? Mine is over 800 so I don't really pay any attention to this, but isn't 760 generally considered to be all you need to get the best rates?

On the free online scores I get various place (credit card company, Credit Karma, etc.) I've sometimes seen > 800 noted as exceptional, while 760 - 799 noted as only "very good." If that accurately reflects how some lenders group scores I want to maintain mine over 800.

You are placing a big emphasis on the "if" esp. since I have not seen evidence. Consider this from WSJ Buy Side...

FICO SCORE
AVERAGE MORTGAGE RATE
760+ 7.21%
700-759 7.43%
680-699 7.61%
660-679 7.82%
640-659 8.25%
620-639 8.80%
(plenty of other sources with similar charts but the ones I saw all have 760+ as top tier)

and from Quora
"Is there a big difference between 750 and 800 credit score?
With a FICO mortgage score above 760, there are presently no greater tangible advantages than a score of 800. For some banks, the cutoff for prime rate is over 760, so they might give you 0.05% or 0.1% above the prime rate, if you are at a 750..."

I guess if you really worry about your FICO (note, I never worried about or tracked mine, seldom even knew what it, we just acted as adults and always paid on time usually in full, was but we always got loans at the best rate from whatever institution provided the loan) you could open additional credit cards or maybe a zero balance personal LOC. I am sure there are lots of places you can find strategies to improve credit scores if 800 really makes you sleep better.

[mhalley]

2 credit cards from different banks payed off monthly gives you a credit score high enough to qualify for the top tier rate for mortgages, car loans and insurance.

[bd7]

I'm a minimalist in all things, including my finances. I'm generally averse to having more "things" than I need and in finance that means accounts at different institutions.

It's probably not a huge tragedy either way, but I'd point out that however appealing minimalism is, at some point it starts to cost you money (and other things like flexibility and safety). I guess you could say that aside from living like Ted Kaczynski, either you play the game or the game plays you. I'm not recommending over-complexity, but in my experience things like having minimal credit accounts or only one bank account can end up being problematic. You might want to consider having a checking account at Chase as well since your credit cards are there.

As FICOs go, 760+ is as good as you need for most things, but there may be some exceptions. There was a debate a while ago regarding this issue vis-a-vis insurance that I don't want to restart. There may be things that aren't generally known, like who gets what offers from CC companies. I do know first hand that it can make a real difference in the residential rental market in certain cases even when the distinction may seem ridiculous. And to make it all seem even sillier my DW, sporting an 850 FICO, once was rejected for a ho-hum branded rewards card and they cited a projected lack of profitability as their reason.

[exodusNH]

Let's say it did the absolute worst case scenario and dropped it another 20 points and never recovered, which I expect would be overly dramatic for both. What practical difference is there between your current 800 score and a 780? Mine is over 800 so I don't really pay any attention to this, but isn't 760 generally considered to be all you need to get the best rates?

On the free online scores I get various place (credit card company, Credit Karma, etc.) I've sometimes seen > 800 noted as exceptional, while 760 - 799 noted as only "very good." If that accurately reflects how some lenders group scores I want to maintain mine over 800.

There are literally dozens of credit scores. Mortgages generally use different score models, not the FICO 8, 9, and VantageScore 2/3 that you get from credit card companies and Credit Karma.

[grabiner]

A paid-off loan does not disappear from your credit history for ten years. It doesn't count as an open account, but it is still an indication that you have properly handled that type of credit. Thus closing the loan won't hurt your score significantly more than closing one of several credit cards would.

And you can certainly have a score over 800 with no installment loans. When I got my mortgage in 2013, my only open accounts were three credit cards, with the newest one two years old (thus no inquiries) and the oldest 11 years. My one installment loan (an auto loan paid off in 2002) had aged off my report. My score was over 810 on all three bureau reports.

[Dolcetto]

I'm a minimalist in all things, including my finances. I'm generally averse to having more "things" than I need and in finance that means accounts at different institutions.

It's probably not a huge tragedy either way, but I'd point out that however appealing minimalism is, at some point it starts to cost you money (and other things like flexibility and safety). I guess you could say that aside from living like Ted Kaczynski, either you play the game or the game plays you. I'm not recommending over-complexity, but in my experience things like having minimal credit accounts or only one bank account can end up being problematic. You might want to consider having a checking account at Chase as well since your credit cards are there.

As FICOs go, 760+ is as good as you need for most things, but there may be some exceptions. There was a debate a while ago regarding this issue vis-a-vis insurance that I don't want to restart. There may be things that aren't generally known, like who gets what offers from CC companies. I do know first hand that it can make a real difference in the residential rental market in certain cases even when the distinction may seem ridiculous. And to make it all seem even sillier my DW, sporting an 850 FICO, once was rejected for a ho-hum branded rewards card and they cited a projected lack of profitability as their reason.

Thank you for this! The bit about a person with an 850 credit score being unprofitable for a credit card company gave me a good laugh last night. Yep, I don't know what Chase earns in transaction fees, but I imagine that my business is a net loss for them given the rewards that I get.

And, yes, I have considered the risks of not having multiple banks, credit cards at different companies, and such. I have emergency cash that would be enough to get me through any foreseeable technical issue. Aside from that, as we saw with bank failures recently, I'm confident that larger issues would be handled quickly by the authorities so I'm not really concerned.

[Dolcetto]

A paid-off loan does not disappear from your credit history for ten years. It doesn't count as an open account, but it is still an indication that you have properly handled that type of credit. Thus closing the loan won't hurt your score significantly more than closing one of several credit cards would.

And you can certainly have a score over 800 with no installment loans. When I got my mortgage in 2013, my only open accounts were three credit cards, with the newest one two years old (thus no inquiries) and the oldest 11 years. My one installment loan (an auto loan paid off in 2002) had aged off my report. My score was over 810 on all three bureau reports.

This is what I was looking for. Thank you!