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I have $11,000 in subsidized loans. One loan is for $5,500 @ 3.9% and the other is $5,500 @ 4.5%. I must pay off the loans within 10 years, but there is no penalty for paying them off early. I will graduate this May and begin working with a wage high enough that I could completely pay off my loans in just one year without it being a significant burden. This would decrease the total amount I pay because of interest.

I have been trying to build up a credit score over the past year or two and I am up to 734 (Good). I understand that part of my credit score is based on the average age of all my accounts. Thus, I believe that my credit score will be better if I do not pay the loan off early, because the average age of my accounts would then be larger.

The part I don't understand has to do with payment history, which is also a factor in credit score. Say that over the course of a year I pay both loans off completely, except for $1 each. Then for 9 years I make no payments until the last month of the last year, when I pay off the remaining $1 (plus accrued interest on $1 over 9 years). Would this help my credit score? I'm not actually making any payments over that time, so would my payment history be good? Should I plan to make a payment of 1¢ every month to ensure that it would actually count as payments?

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    You are mistaken in the belief that leaving loans open raises one's credit score. – Pete B. Apr 6 '18 at 19:19
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Don't hold on to debt and pay interest on it for the possible benefit of your credit score. That's letting the tail wag the dog.

If it makes sense for you to pay 4.5% on that money to have more liquidity, then fine keep the debt. Make your decisions based on what would be the best for you financially not what you hope will be best for your score.

Regarding your plan to simply leave a loan balance of a single dollar, you probably couldn't. Most (I'd say all but there are probably outlier exceptions) loans have minimum payment and minimum finance charge provisions. Minimum payment means if your total due falls below some threshold your next due payment will be your entire balance. Minimum finance charge means if the interest charge would be below say $0.50 then the interest charge is $0.50.

Even though you probably couldn't do what you're proposing I still maintain that you should not make decisions with the hopeful intent of improving your credit score, especially when it's already 734. For most lenders the "well-qualified" offer threshold is 720 or 730; though this changes over time. If you were in repair mode and your score was 520 my answer would be different. In your situation you're simply adding complications that might not even bear fruit. And for what it's worth, even at a score of 520 you would not improve your score by intentionally keeping a loan running longer; it would be about prioritizing the various repayments.

Have you ever pulled your credit report? That was very enlightening to me the first time I did it. Go to annualcreditreport.com and look at what data is actually reported and how it is reported.

  • Surely 3.9% interest on $1 over 9 years would not be significant? – Jon McClung Apr 6 '18 at 19:01
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    Loans typically have a minimum payment and/or minimum finance charge provision. You can't hold $1 at 3.9% over 9 years because if your loan balance is below X your minimum payment will be your entire balance. – quid Apr 6 '18 at 19:02
  • Thank you for explaining this. As a programmer I always try to exploit the rules of systems to achieve my goals creatively, but wanted to make sure I understood this system fully enough to be confident my plan would work. I'm glad I was able to find someone knowledgeable enough to explain this to me and also point out that I don't really need to spend much energy optimizing this area of my life anymore. I tried the website you pointed me to, but it was giving me issues and wouldn't let me see my scores. – Jon McClung Apr 6 '18 at 19:30
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    No problem. Annual credit report is about seeing your credit reports from the three bureaus, Transunion, Equifax and Experian. You don't get to see the scores for free but you get to see your reported account information and what and how the information stored. It was an eye opener for me the first time I saw a report and saw what actual information it contains. – quid Apr 6 '18 at 19:35
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    Regarding score, paying off the loans will likely result in a drop in score (especially if you have no other installment loans), but it will recover in a month or two, and shouldn't be significant. The paid-off loan will be reported for 10 years. I agree that it's not worth paying anything to try to goose credit score. – Hart CO Apr 6 '18 at 19:38

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