Student Loans and Credit Scores [Archive] - Glock Talk

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HalfHazzard
12-02-2012, 06:26
Hypothetical: Pretend that someone has enough cash saved up to pay for college, but wants to improve their credit score. Would taking out student loans each semester, and then paying them back using the cash the person already has before interest kicks in, be a good way to build credit?

With a normal loan, I'd say yes. Any ideas?

FullClip
12-02-2012, 06:31
Sometimes paying off a loan early can actually hurt your credit score. Lenders count on that interest (not late fees) as income. When you pay off the loan early, you "rob" them of the profit they had forecast. Some loans even have penalties built in for early payment.
But in my very, very, very, unqualified opinion, screw a credit rating and avoid going in the hole if at all possible. It's a very good feeling not owing anybody anything.

kiole
12-02-2012, 06:48
First off student loan debt is the worse kind it never goes away. Its very unlikely to be discharged in a bankruptcy. Your much better getting a credit card and using it intelligently.

I had a 750ish credit score and had trouble getting my first car loan because all my previous accounts were credit cards. After I got my first car loan and paid it for 3-4 months at 6% I was able to refinance at a credit union that previously rejected me for 1.99%. I now am financing a Jeep through Chase at 0% for 36 months.

sheriff733
12-02-2012, 07:11
If you have cash to pay for it, PAY FOR IT WITH CASH.

Don't worry about your credit score.

sheriff733
12-02-2012, 07:18
Credit Score:

http://www.daveramsey.com/article/the-truth-about-your-credit-score/lifeandmoney_creditcards/

Student Loan Debt:

http://www.daveramsey.com/article/student-loan-backlash/lifeandmoney_college/

Jonesee
12-02-2012, 08:09
Hypothetical: Pretend that someone has enough cash saved up to pay for college, but wants to improve their credit score. Would taking out student loans each semester, and then paying them back using the cash the person already has before interest kicks in, be a good way to build credit?

With a normal loan, I'd say yes. Any ideas?

I would't advise it. Student loans have their payments deferred, but the interest accrues like any other loan.

I would advise you to take the tried and true approach. Get a credit card, use it wisely, pay it off monthly. Later, get a second card with a higher limit and use it enough to keep it active, but pay it off monthly.

While you are doing all that, open an account at a credit union. Move your money there. When it is time to buy a car, go through them.

You just earned a credit score in the low 700s.

Jonesee
12-02-2012, 08:10
Sometimes paying off a loan early can actually hurt your credit score.

This is not true.

Z71bill
12-02-2012, 08:17
Get a couple of credit cards - use them to buy stuff you would buy anyway - pay the bills in full every month.

Put your education on the CC if you can without any penalty (some colleges charge an extra fee) then pay the bill in full when it comes.


Creditors like to see a consistent record where people have paid their bills every month.

FullClip
12-02-2012, 08:27
This is not true.

I'm not a financial adviser but have always been told that making the payments on time, and for the full term of the loan was the best way to make points on your credit.

A little Google on "early loan payment credit score" brought up these links and a whole lot more like them, that kinda' back up my statement. After all, it's on the internet, so it must be true....bull-do-do.

http://www.experian.com/ask-experian/20110316-paying-off-a-debt-early-wont-help-credit-scores.html

http://www.bankrate.com/finance/debt/pay-off-loan-credit-score.aspx

http://www.moneyunder30.com/paying-off-an-auto-loan-is-bad-for-your-credit-score


Not saying they're 100% spot on in all cases, but what's the real scoop? If you work inside the world of finance, then please fill us in on how it really works.

Patchman
12-02-2012, 09:01
Hypothetical: Pretend that someone has enough cash saved up to pay for college, but wants to improve their credit score. Would taking out student loans each semester, and then paying them back using the cash the person already has before interest kicks in, be a good way to build credit?

With a normal loan, I'd say yes. Any ideas?

Getting a CC and using it responsibly is the best and cheapest way to build a good credit score. What you're describing is another way to build credit. However, IIRC, I'm not sure there's ever an interest-free period. (ie: "before interests kicks in").

When my oldest started college, we wanted to help her build her credit. She wasn't eligible (by herself) to get for a CC, so one of the things I looked at is what you described. IIRC, there were different payment options and one (immediate repayment on a monthly basis) would cost the least, but still the interest was worked into it.

One way with a student loan (or even an unsecured personal loan) is to borrow a minimum amount (say $5000) and pay that off ASAP. The interest you will pay is minimal compared with the good credit history/score you just earned (bought).

HarlDane
12-02-2012, 09:25
Just to clear up some of the misinformation in this thread:

Subsidized student loans do not accrue interest or require monthly payments until after you leave school. Un-subsidized student loans do accrue interest while you're in school, but don't require monthly payments until after you're out.



As for the OP:

I don't know how much it would really help your credit if you paid them off completely the minute they became due. While early payment won't hurt you, it doesn't build credit like regular, on time, monthly payments. But to do that, you're going to eat the interest.

I graduated in Aug. and my loan payments start this Feb. My wife just started school and while we no longer need student loans, I plan to take her subsidized loans and use them to pay off mine, while also making my monthly payments. This allows me to defer some of the interest further, while not increasing our overall debt load.

Patchman
12-02-2012, 09:33
Just to clear up some of the misinformation in this thread:

Subsidized student loans do not accrue interest or require monthly payments until after you leave school. Un-subsidized student loans do accrue interest while you're in school, but don't require monthly payments until after you're out.

Interesting.

Subsidized student loan is from whom? Funded by the Feds but applied for through banks?

Unsubsidized is from whom? And I assume the un-subsidized has higher costs (ie: higher interest rate?)

HarlDane
12-02-2012, 09:47
Interesting.

Subsidized student loan is from whom?

Unsubsidized is from whom? And I assume the un-subsidized has higher costs (ie: higher interest rate?)The government took over the student loan program, when I took mine out, they were subsidized by the government, but held by private banks. Mine are now all held by the Dept. of Ed.

Currently, the rates on subsidized loans are lower (3.4%) than the unsubsidized loans (6.8%), but a few years ago they were the same. Subsidized loans are also need based, unsubsidized loans are not.

devildog2067
12-02-2012, 10:53
Hypothetical: Pretend that someone has enough cash saved up to pay for college, but wants to improve their credit score. Would taking out student loans each semester, and then paying them back using the cash the person already has before interest kicks in, be a good way to build credit?

No.

You're charged an origination fee of a percent-and-a-bit on a student loan (for administrative costs and to insure it against your death).

Doing this would be like setting 1+% of whatever you borrow on fire.

devildog2067
12-02-2012, 10:54
However, IIRC, I'm not sure there's ever an interest-free period. (ie: "before interests kicks in").


Subsidized student loans are interest-deferred until 6 months after graduation or the end of full-time enrollment.

devildog2067
12-02-2012, 10:55
Subsidized student loan is from whom? Funded by the Feds but applied for through banks?


No, funded entirely through private banks.

The federal government pays the interest until you graduate, but the actual lender is a private lender.

EDITED TO ADD: I forgot about Federal Direct loans, because they're only available to undergraduates and I haven't been undergrad for a long time. For those loans the lender is the US Department of Education. So my statement above is not correct, there are some cases where the actual lender is the government.

RenoF250
12-02-2012, 10:59
As some have said, probably the best thing to do is get a credit card and use it for your purchases and pay it off each month. Then you can get ~2% back, and not carry cash. Much safer than using a debit card as well. I buy almost everything on my Discover card. The only downside is it is too easy so I think you spend a bit more but I really do not buy much that is optional anyway. Mostly food, prescriptions, home stuff, etc.

FullClip
12-02-2012, 11:08
No, funded entirely through private banks.

The TAXPAYERS pays the interest until you graduate, but the actual lender is a private lender.

EDITED TO ADD: I forgot about Federal Direct loans, because they're only available to undergraduates and I haven't been undergrad for a long time. For those loans the lender is the US Department of Education. So my statement above is not correct, there are some cases where the actual lender is the TAXPAYERS.



Sorry DD, but had to fix it for ya'.:supergrin:

jakebrake
12-02-2012, 11:09
If you have cash to pay for it, PAY FOR IT WITH CASH.

Don't worry about your credit score.

hypothetically

devildog2067
12-02-2012, 11:12
Sorry DD, but had to fix it for ya'.:supergrin:

Good call :wavey:

vikingsoftpaw
12-02-2012, 20:05
Hypothetical: Pretend that someone has enough cash saved up to pay for college, but wants to improve their credit score. Would taking out student loans each semester, and then paying them back using the cash the person already has before interest kicks in, be a good way to build credit?

With a normal loan, I'd say yes. Any ideas?

Taking out student loans will raise you credit score. If they are paid back on time. Anything to continue building a positive credit history will help.

Post unemployment, my credit score went down under 400. My student loans brought that back up to ~650.

HalfHazzard
12-03-2012, 16:43
Great answers from the brain trust. Thanks for the input!