College Loan Question?
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wrote on 12 Jan 2023, 01:18 last edited by
Luke has $1200 he wants to put towards the principal on his loan. Paying it down now will obviously have the best benefit in lowering the interest accruing, but would there be any benefit to his credit rating by making 12 monthly installments of $100 instead?
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wrote on 12 Jan 2023, 01:49 last edited by Mik 1 Dec 2023, 01:51
He’ll get a credit rating when he needs one, and that’s not now. If you do that you are essentially paying for a credit rating by increased interest.
When he graduates and is working there will be plenty of folks wanting to give him a credit card. I recommend Amex where he has to pay it off every month.
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He’ll get a credit rating when he needs one, and that’s not now. If you do that you are essentially paying for a credit rating by increased interest.
When he graduates and is working there will be plenty of folks wanting to give him a credit card. I recommend Amex where he has to pay it off every month.
wrote on 12 Jan 2023, 02:49 last edited by@Mik said in College Loan Question?:
He’ll get a credit rating when he needs one, and that’s not now. If you do that you are essentially paying for a credit rating by increased interest.
When he graduates and is working there will be plenty of folks wanting to give him a credit card. I recommend Amex where he has to pay it off every month.
He has a small credit card ($500 limit) that he pays off every month, and we’re paying off the interest every month so all he has to worry about is the principal. So he’s already building credit, but a 20point difference in FICO can swing his interest rate by .5%. That adds up over another two years of undergrad… I just don’t know if him paying above and beyond his monthly makes a difference.
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wrote on 12 Jan 2023, 04:08 last edited by
To improve credit rating, would it be better to pay off a loan in one lump sum or pay off a loan over 12 equal monthly installments?
Paying off a loan in one lump sum can have a positive impact on your credit rating, as it shows that you are able to pay off your debt in full and on time. However, paying off a loan in one lump sum may not always be possible or practical, depending on your financial situation.
Making consistent and on-time payments over 12 months, or the length of the loan, also demonstrate your ability to manage credit responsibly and can also improve credit rating. This would also help you to budget and plan your finance effectively.
It's important to note that paying off a loan early, whether in a lump sum or through extra payments, could also result in a prepayment penalty, depending on the terms of the loan. In some cases, the penalty could offset any potential savings from paying off the loan early. It's always a good idea to check the terms of a loan carefully and consider the costs and benefits before making a decision.
It's also important to consider the credit utilization ratio which is a important factor in credit scoring, this ratio represents the amount of credit you are using compared to the amount you have available to you. Paying off a loan may increase the amount of credit available to you, resulting in a lower utilization ratio which in turn can improve credit rating.
Ultimately, the best approach will depend on your individual financial situation and goals. It may be a good idea to talk to a financial advisor or a professional before making a decision.
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@Mik said in College Loan Question?:
He’ll get a credit rating when he needs one, and that’s not now. If you do that you are essentially paying for a credit rating by increased interest.
When he graduates and is working there will be plenty of folks wanting to give him a credit card. I recommend Amex where he has to pay it off every month.
He has a small credit card ($500 limit) that he pays off every month, and we’re paying off the interest every month so all he has to worry about is the principal. So he’s already building credit, but a 20point difference in FICO can swing his interest rate by .5%. That adds up over another two years of undergrad… I just don’t know if him paying above and beyond his monthly makes a difference.
wrote on 12 Jan 2023, 04:37 last edited by@LuFins-Dad said in College Loan Question?:
@Mik said in College Loan Question?:
He’ll get a credit rating when he needs one, and that’s not now. If you do that you are essentially paying for a credit rating by increased interest.
When he graduates and is working there will be plenty of folks wanting to give him a credit card. I recommend Amex where he has to pay it off every month.
He has a small credit card ($500 limit) that he pays off every month, and we’re paying off the interest every month so all he has to worry about is the principal. So he’s already building credit, but a 20point difference in FICO can swing his interest rate by .5%. That adds up over another two years of undergrad… I just don’t know if him paying above and beyond his monthly makes a difference.
If he's paying off the credit card each month, what interest are you paying off? Or maybe I misread that or perhaps the interest refers to the student loan?
Anyway, I don't think paying above the monthly helps that much. There's probably a middle ground of paying a bit more than is required without completely paying it all off. I'd imagine credit scores like seeing reliable payments (obviously) but also debt-to-income ratios that aren't unmanageable.
That being said, if he pays off his credit card each month, IMO its better to focus on minimizing any debt than worrying about the impact to credit score. In that light, paying $1,200 towards his principle is a good move and helps set a good mindset of getting rid of debt as quickly as possible.
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wrote on 12 Jan 2023, 10:14 last edited by jon-nyc 1 Dec 2023, 10:16
I don’t know the answer. It might matter if it’s a private student loan vs federal, I could imagine credit agencies treating the latter differently given all the deferment options, payment moratoria, etc.
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wrote on 12 Jan 2023, 17:11 last edited by
I'm a simple person. I don't like debt.
If I had the money to pay off part of my debt, I'd pay it.
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wrote on 12 Jan 2023, 17:34 last edited by
FICO Simulator
https://www.myfico.com/fico-credit-score-estimator/estimator
My actual FICO score is above the range I got from this simulator.
But it might get you in the ballpark.