One Payment = End of Student Loans

[Junket]

My student loans are nothing compared to those that are enrolled in school for their bachelor's.

I went to trade school which cost about $8,000.00.

I used my AmeriCorps education award of $4,725.00 to pay off the initial half, and took out a loan of $2,100.00.

The remaining amount was forked to my dad because they wouldn't allow me to take out a loan by myself. My dad didn't want me to pay off the extra thousand because he was just happy I went to school at all, and he always said he'd pay for my school if I'd go at all.

My payments start this April.

My payment plan is set for $50.00 per month.

If I pay it off in one go however, I will only have to pay $2,107.49, and be debt free. There isn't any downside to paying it all off is there? I'm wondering if it'd look better on my credit to do it all at once or draw it out a little. I just don't see the point in paying more if I don't have to...

Is Scorp in the house?

[anachronistic]

I am curious what Grk has to say. My mindset would also be to pay it all off with the first bill so that I could make payments on the loan. I think it would look better on your credit than holding off. Would you rather have someone take a look at your credit and go "Holy shit! You payed that off pretty fast! And without debt!", or "Well, you handled this transaction without debt."

But I am inexperienced with money, better hold off and hear what other people have to say before you make a move.

[Junket]

Yeah, I'm just curious about how much time is a factor in establishing good credit.

I need to check my credit score, but I have no doubt it's good because I've never missed a payment on my credit cards and I think paying off this loan will only reinforce that.

[Illusional]

the main thing that they creditors will look at is if you're making timely payments. i think that they don't really care as long as you're making the minimum payments of 50.

raverboy

[vashti]

I always vote for paying it off. Why would you want to pay the interest?

[GrkScorp]

I always vote for paying it off. Why would you want to pay the interest?

I agree.. Interest is rent on using someone else's money.. And there's no reason to pay it if you can just cover the cost of paying back what you owe, comfortably.. (enough money left over for other monthly expenses)

First of all, congrats on covering the majority of the cost already

Now, if you have a good interest rate, (below 6%).. It's actually a good way to build up your credit..

$50 a month is nothing.. but everytime you make a payment, and you have outstanding credit balances, your payment gets reported.. (yes, the system is retarded that way.. if you pay off everything in full.. that payment never gets reported, and to top that off, after that point, you have a period of being debt-free, which is good, but bad for your credit, because it creates a blank, a period of no credit history, no proof that you're making payments on time).. In my opinion, I don't see any rational behind the system other than creative motives and incentives for people to be in some form of debt to try and build up their credit..

If terms of your student loan, alone, you can deduct all student loan interest under line 33, on form 1040.. and that's pretty much the only good news.. That and that it builds up your credit when you make payments..

We have a financier on the forum, so he can add his personal opinion into this.. but if you study the credit reporting system closely, there are some things that you can do to boost your credit:

- Own assets (favorably land and other fixed assets)
- Have a steady flow of income

(Notice, both of those are stock & flow variables, wealth & income, which determine your ability to pay off debt, your personal solvency)

Aside from those, which you should be doing anyway.. the system is big on "history".. it wants strong evidence to support that you have a history of not just making payments, but making them on time, consistently, and over what is required..

- Making payments on time (not being late)
- Making payments consistently (not missing a payment)
- Paying over what is required (not paying just the minimum, but above the minimum "hint, take the minimum payment and add 65% to it, it's the most efficient way to optimize the positive results on your credit score from this measurement" but this mostly applies to credit cards, not fixed payment loans)

(Notice, how you must have a balance due at the end of each reporting period in order for this to carry over onto your history)

There's a catch when it comes to your credit history.. Each positive step you take, is nothing in the face of one negative step.. If you take 10 good steps.. all it takes is one big step backwards to throw you off..

- Everytime a lender or anyone else must request a copy of your credit score (with the exception of Federal & State employers) it drops your score by 3-5 points
- If you have no recent credit history or activity for 6 months or over, your credit score drops significantly
- If you have a late payment, it drops significantly
- If you have a second late payment or a missed payment, good luck..

And here's my favorite:

- Just as your credit score is getting good.. just as you hit 750+ last week.. you look up to find that you're now down to 680+.. why? Because periodically, as your credit history becomes more stable.. as your trend becomes stronger.. you are placed into a different group.. this is more accurate, the term is called stratification.. but it screws you over, because now among this new group of people, you're a rookie.. Among the people who had a fairly new credit history, you were king.. but now you just got promoted, and among the senior partners, you're not looking too sharp.. So it's not unusual to see a 30-70 point drop in your credit score after you hit over 700.. even if you did nothing wrong..

So.. the best advice on building up credit was given to me by my uncle.. and by my father respectively..

- Buy a house (think about it, you have a fixed asset, it can even be earning income if it's more than a single family home, you're going to be making mortgage payments for the next 30 years, plus your primary residence comes with all sorts of tax benefits)

- Take out a $1,000 personal loan with a compensating balance within an account at the same bank, allowing it to make automatic withdrawls each month.. (you usually get a lower rate if that's the case.. but since the object is to get a lower rate)

- Take out a student loan.. You're not going to find a lower rate.. plus.. the drawback with automatic withdrawls is that they don't boost your credit score as much.. When the nature of the debt is reported, it's reported as a personal loan with a compensating balance and automatic withdrawls set up.. that shows lower responsibility.. but when you have a student loan that you're making payments on.. you're getting a lower interest rate.. AND.. because the payments aren't automatic.. it boosts your credit score more.. You win both ways..

Tricks with credit scores & reports:

- Unless you're planning to finance a land or durable-good purchase soon, there's no need to worry about your score that much
- Unless you're thinking of renting a new place or find a new job, you shouldn't worry about your score that much
- Monitor your score every month.. Providian.com (which I believe offers a Visa product) offers a great service to allow you to monitor your score every month without adversely affecting your score..
- When you're happy with your credit score, order a copy and print several copies to have them on hand (remember, people will accept recent credit reports, and you don't want 10 people each dropping your score when they request such information.. so it's better to think ahead)
- When you have purchased your new home, or durable-good, or got that new job, or apartment.. and you're able to pay off any outstanding balance in full.. do so! There's no point in trying to maintain your credit score when you've used it to get what you want.. (besides, it's almost impossible to go on for 6 whole months without tapping into your credit.. charge a dinner on your card.. and pay off everything, but for $5.. just leave that $5 there.. your payment gets reported, the next month you can pay off the $5 balance, and the 6 month clock starts all over again.. plus you still maintain credit history so your score never really drops.. and you basically stick the finger to the credit reporting system)

Best,

GrkScorp

[anachronistic]

$50 a month is nothing.. but everytime you make a payment, and you have outstanding credit balances, your payment gets reported.. (yes, the system is retarded that way.. if you pay off everything in full.. that payment never gets reported, and to top that off, after that point, you have a period of being debt-free, which is good, but bad for your credit, because it creates a blank, a period of no credit history, no proof that you're making payments on time).. In my opinion, I don't see any rational behind the system other than creative motives and incentives for people to be in some form of debt to try and build up their credit..

Interesting point; I must admit that I concur. Good topic for a paper. Maybe it is intentionally set up that way.

[IndiReloaded]

You don't say whether the loan is interest free or not.

I had a small interest-free loan when I was a student for living $. Turns out I didn't need all of it, so I made payments into a mutual fund account. When I graduated, I made some interest & paid off the loan in a lump sum.

As far as gaining credit, many banks will offer a small limit credit card (on the order of $500) to students/new grads. I would suggest you get one & use it sparingly (say for gas for your car if you have one). Pay it off each month. That will give you a credit record you can refer to later.

[misombra]

interest free loans aaaaaaaaaaaaaaaaaaaaajajajaaaaa.


aaaaaaaaaaaaaaaaaajajajaaaaaa.

[IndiReloaded]

interest free loans aaaaaaaaaaaaaaaaaaaaajajajaaaaa.


aaaaaaaaaaaaaaaaaajajajaaaaaa.

The US gov doesn't offer anything like that? Not even low-interest loans?

Move to Canada, Fras. I will adopt you & Amy so you can get citizenship & all this stuff. Free healthcare too.

[misombra]

nothing is free in america. or cheap.

but we get better drugs, that's what keeps us around.

[GrkScorp]

Interesting point; I must admit that I concur. Good topic for a paper. Maybe it is intentionally set up that way.

When you look at it as a whole, it seems that way.. there's no other reason to set up the incentives that way.. I understand missed payments, late payments and bankruptcy should have a big negative impact on your score.. but a 6 month gap in your credit history should not be set up to hurt your score that much, then again, I just showed one way to get around it easily..

What bothers me though, is how strong income & a high net worth won't impact your score as much as a historical trend of paying (on time, consistently, and over the minumum)..

If I had to look at a person's income & net worth (Assets - Liabilities).. It's pretty easy to already see which people are able to make good on their debt.. In my opinion, those two first indicators should have the most weight on your score.. however, financiers raise a different argument..

(Look at Trump): "Yes, that's the argument".. Here's an individual who was very solvent, more than had the net worth to support additional debt, more than had a steady flow of income to support the monthly payments.. But has filed for bankruptcy twice, has postponed payments on his debt for over a year, and is now able to file for bankruptcy again if he wanted to.. The argument is.. "given his history alone, is this someone you would want to lend to?"

My counterargument to that is, that the "reason" for such a history is conditional.. The main factors that cause such a situation is the borrower taking on too much risk; poor risk management & risk analysis.. If you go in for a small-business loan today (nevermind a loan for a larger business).. the banks will eat you alive for questions about the nature of the business, the experience of the owners and managers involved, proof that all regulations and licensing requirements have been satisfied, projected financial statements of the business, or actual financial statemtents of the business (which you'll have to convert to accrual, and then perhaps agree to have the banks auditors proform a review for some level of assurance on your financial statements).. The most important question is.. "What do you want to do with the money?".. Yes, they know you make a lot of money each month, they can see you have plenty of assets and not too many liabilities.. they can see that.. but they want to know what you're going to do with the money.. and ask themselves if they can reasonably expect to recover.. This is something each bank must ask itself before it issues such a small-busienss loan, especially to a new business.. A credit history is actually a poor indicator of future preformance, because no venture is exactly the same, and it doesn't guarantee to any degree the same history in the future (because such history is circumstantial).. The bank will be in a better position to gauge the credit risk it's taking right there and then by reviewing all the details, rather than placing so much reliance on the limited information credit history can provide..

Ironically, an excellent example for this counterargument is.. (Student Loans)

Students who don't even have credit yet, can still get student loans.. Because lenders know what they are using the money for.. their use is limited, it's in the agreement.. lenders know the student can't ever wipe out the debt by bankruptcy.. and that after attaining a higher education, will be earning more money and be able to pay back such debt.. Those details are already incorporated into standard student loan agreements.. which is why it's fairly easy to get a student loan.. the credit score doesn't affect a bank's willingness to issue the loan at all.. the only thing it affects, is the interest rate at which it will be issued at..

But again, for student loans, this is not justified.. (there's federal legislation in place to give lenders enough assurance that they will get their money back..).. Any risk they are taking is obvious at the time the contract is made.. Bankers can easily say that if they wouldn't get a higher interest rate to cover the additional risk, they would never issue such loans to some students with no credit history.. But all real risk is exposed and obvious at the time of contract, credit history is not a real indicator of risk the bank is taking.. But i'll tell you why they want it.. Here's the real reason..

It's assurance.. If you don't pay, they'll hurt your credit score.. It's that simple.. And a person who has no credit or bad credit could care less.. but a person with good credit cares more.. So when you bring your father or mother with you to co-sign on the loan.. The bank now feels that it has one more string they can pull if payments start to go sour.. and the more strings it can pull, the lower your interest rate.. They will argue that they are now taking on lower risk, but in reality.. the risk is the same, they just got additional assurance..

There's one justification for the credit reporting system however, which is why it's still the way it is, because this justification is HUGE.. Credit Cards..

Yup.. when you charge something on plastic.. it's unsecured debt.. it's not tied to some asset the lender of those funds can take away from you and try and recover from.. no.. the lender is taking your word on it.. that you'll pay them back.. But if i'm a lender.. it's not practical for me to ask my borrowers, "do you really need that extra gallon of milk in your grocery bag? she's not that interested in you, are you sure you want to pay for her dinner? how well do you manage your personal expenses? can you really afford a car right now? etc.." There are thousands of questions to ask, and millions of customers to ask them to.. But to speed up the process, good indicators are obtained during your credit application process (income, social-security to look up your assets & outstanding debt, and occupation which is linked to both income and financial management "that's right, professional occupations enjoy a lower rate on credit cards").. And credit history is really the only up-to-date indicator these companies can rely on, and adjust their rate accordingly.. If you don't pay.. they can take you to court and issue an order to demand that you pay (which still means they don't have your money).. and then again, if you don't pay, they can only harrass you until you either do or file for bankruptcy.. But if you have "good credit".. this (1). shows them that you do pay in a manner which would be good for them as a lender, (2). you have incentives in place that motivate you to pay in order to maintain your credit score, which means that they have some assurance that you will not miss payments because that would negatively impact your credit score (But again, throw that last little point to the financier's Trump argument).. This is why credit card interest is so high.. 7%-29.99% APR (compounding DAILY).. That can translate to as much as 34.96% effective annual interest on such debt (an extra 5% bonus for your credit card company, and all they had to do was use the term APR instead of APY on your agreement) Don't you just love them?

Best,

GrkScorp

[Junket]

I have 2 credit cards (Chase and Capital One) and several checking and savings accounts (which I will soon consolidate now that I'm reasonably settled in one place).

I use my Chase card for pretty much all of my expenses, and never carry a balance into the new billing period. I'm not looking to buy a house anytime in the near future, however, overall, I care more about paying less than I do about maintaining a good credit score.

I've never missed a payment, or payed late. I've never overdrawn my accounts and I do my best to keep all of my accounts liquid.

[Gigabitch]

Having a debt paid off looks good on your credit report too, Fras.

[PussyCatDoll]

my bf is an economist. he keeps telling me how to invest my student loan.