Will slowing down my loan payments help my credit?
November 9, 2012 4:07 PM   Subscribe

The only loans I have are student loans, which I'm working hard to pay off. Would it be better for my credit score if I stopped paying them down when they reach $5.00 and then just pay interest from then on?

I'm living frugally and putting every extra cent I make into my loans: I'm looking at paying them off in 2-3 years. But I know that it improves credit scores to have a long history of on-time payments made. I'm not the sort of guy to take out a loan when purchasing a car though, so student loans will probably be the last loans I have before I buy a house.

I think I might have a minimum payment amount regardless of the amount left, but say for one of them the minumum is $100/month. If I pay it down to $1000 and I have $1000 in my pocket, is it better to pay that off immediately, or slowly pay it down over 11 months?

I'm aware that I'll be incurring interest, but I have the feeling that the extra interest paid will be small compared to the benefit of better credit when purchasing a house.

Another question: since I have multiple loans, is it better to pay them all off at the same time, or is it better to pay one down as much as possible before bringing the others down?
posted by brenton to Work & Money (18 answers total) 1 user marked this as a favorite
Get a credit card. Use it to pay for gas and food and other necessities. Pay it off every month. Credit achieved without accruing interest.
posted by murfed13 at 4:12 PM on November 9, 2012 [4 favorites]

Another question: since I have multiple loans, is it better to pay them all off at the same time, or is it better to pay one down as much as possible before bringing the others down?

This depends on your interest rates. Pay the higher interest loan off first, all things being equal.
posted by murfed13 at 4:15 PM on November 9, 2012

All loans are the same interest rate.

Also, I do make purchases with credit cards, which I auto-pay the full balance on every month. I'm one of those nutty penny pinchers who is also obsessively strategic. So yes, I'm building some credit with credit cards. But what can I do to get the best possible credit? I know that if this helps, it probably won't help much, but I figure, why not do it if it isn't any extra pain?

tl;dr: will my scheme help my credit at all?
posted by brenton at 4:20 PM on November 9, 2012

It helps your credit in theory to take out and then to pay off loans. So yes, there might be some minor benefit to completing the loan payment.

Everything dealing with your credit score is wizardry however; there are no real hard and fast rules, just hand-wavery explanations and the three companies rarely agree on your score, sometimes with wide variance.
posted by hobo gitano de queretaro at 4:23 PM on November 9, 2012

I have never had student loans or any debt other than my mortgage, and I had no problem getting approved for a mortgage at 27 based just on the fact that I had a lot saved for my down payment and had had a credit card since I was 20 that I had always paid off in full every month. Don't worry about your credit score. Become debt-free as quickly as possible and pay as little in interest as possible, and then save as much as you reasonably can, and you'll be fine.
posted by orange swan at 4:24 PM on November 9, 2012 [3 favorites]

@hobo, are you saying there is a benefit to paying the loan off completely? I'm actually asking if there is a benefit to delaying paying off the loans.

@orange, wouldn't you have gotten better mortgage terms if you had had better credit?
posted by brenton at 4:31 PM on November 9, 2012

2-3 years plus the time you've already invested should be enough. Pay the $5 and get this off the books, so to speak. That'll look better.
posted by iamkimiam at 4:36 PM on November 9, 2012 [2 favorites]

I don't know the answer to your original question, but since you've commented that you're trying to build the best credit possible, you might find a lot of really helpful information over at the FatWallet Finance forums. "Obsessively strategic" describes the folks who post there perfectly.
posted by rhiannonstone at 4:59 PM on November 9, 2012

Supposedly the extra on-time payments help your credit score slightly, especially if you don't have that long of a payment history. I did something similar right out of college with a car loan. I don't have a cite for that though, I just heard from people that it helps your score to have extra on-times recorded every month. If you don't have much of a payment history the only real way to improve your score is just to let time pass without any delinquencies and keep your credit card accounts open. It sounds like you are gaming your score pretty well already and as long as it's going to be a while before you take out a big loan you should have a good enough score to get the best rates without having to squeeze out a few extra points. When it comes to a mortgage, lenders take more of a magnifying glass to your overall financial situation (job, savings, etc.) and your exact credit score doesn't matter as much.
posted by burnmp3s at 5:00 PM on November 9, 2012

First off, the benefit of doing this will be extremely small, if any. Your credit score will improve simply by paying off loans and getting them off the books, probably more than any benefit from on-time payments will help.

Another reason not to do this, if you're not careful you can end up paying a lot of extra interest. Be very sure that your payments are being applied to the loans principal. Sometimes, banks will take any overpayment and apply it to the following month's payment. This can result in the next payment not being due for several months if your overpayment is large. But, you don't actually save any money on interest when they do this, it just counts as having made several payments on time. This ended up happening to me when I made a large lump sum payment on my student loans and did not realize that they applied that money to the next year's worth of payments. My due date changed to one year in the future, but I would have had to pay interest on all that money even though I had already paid them if I had not called and got it straightened out.
posted by skewed at 5:31 PM on November 9, 2012

I think part of the deal with student loans is that there is a point by which you need to have finished paying them off. So if you stop paying them down and then just keep paying the interest off but leave the rest of the loan unpaid, you may be making payments just fine but you've still gone over the deadline for paying off your loan, which I'm sure would negatively impact your credit.
posted by EmpressCallipygos at 7:25 PM on November 9, 2012

You're over thinking this. Pay off your loans and save for a down payment, it's not going to vary your mortgage terms that much. My husband and I bought a house this year and applied separate and together without knowing our credit scores. One of us had a 753 and the other a 5?? and we were offered 2.95% and 2.99% respectively on a 15 yr fixed rate, so yeah, over thinking. Congrats on paying off bills!

Side note: We ended up paying cash for the house, I recommend paying as much of a down payment as possible, it rocks.
posted by julie_of_the_jungle at 7:35 PM on November 9, 2012

It helps your credit the most to not try to game the system. Seriously, I don't mean that in a "mean" way, but a lot of folks try to play games and end up at best making themselves more likely to eventually screw up for no gain (and at worst actually hurt their credit by following dangerously-wrong myths and hearsay).

Pay your loans on time and in full. Pay your bills on time and in full. Pay your credit cards on time and in full. Limit yourself to a handful of credit cards and avoid "store" cards like the plague (pick one or two you use constantly, like perhaps Amazon and a gas card, and then "just say no"). Don't buy more house/car than you can realistically afford.

In a few years (assuming you have nothing horrible on your credit report currently - In which case, give it a decade), you'll easily have a score in the 700s.

Simple as that.
posted by pla at 7:45 PM on November 9, 2012 [1 favorite]

Credit for what? What do you want to use it for? Buy a house? If you want to use your awesome credit to buy a house, go talk to a mortgage broker and see what they say. Tell them your SL debt will be paid off in three years and ask how it might affect your credit worthiness for a home loan.

I think paying it down to five dollars seems sort of impossible. And how much "good credit" could this possibly buy? The greater likelihood is that you'll miss a payment.
posted by amanda at 9:11 PM on November 9, 2012

Having paid off a loan over a long period of time really can make a difference in your rates or if you're approved for a loan. My husband and I were both like you, and paid off our student loans as quickly as possible. We both hold and use credit cards regularly (but never carry a balance). When we were house and mortgage shopping, we were told that although our credit was excellent, it was "light" and that we would need to put a larger percentage down.
posted by tealcake at 1:22 AM on November 10, 2012

Let me put it to you this way: any marginal benefit to your credit score you might extract from delaying repayment on your student loans pales in comparison to the benefit you've already received from having them in the first place and will receive from moving on to other kinds of credit.

Pay the damn things off.

Also, I'm not entirely sure your lender will consent to interest-only payments. You'll want to look into that. Most of the time that means some kind of forbearance or deferral, and that's something you have to ask for and which the lender is under no obligation to give you unless you qualify, i.e., you're going back to school, are unemployed, etc.
posted by valkyryn at 3:42 AM on November 10, 2012

dangit tealcake, the responses were unanimous until you popped in. now i'm confused again.
posted by brenton at 11:15 AM on November 12, 2012

Student loan debts are a different kind of debt from credit card debt, though, and your credit report will handle both differently.

The biggest differnece between them is that your student loan has a time by which you must be paid off, and if you're not it'll look bad.
posted by EmpressCallipygos at 11:17 AM on November 12, 2012

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