Question about closed credit accounts

DrezDrez Registered User regular
edited July 7 in Help / Advice Forum
Hey all, quick question: I'm well on my path to eliminating all my debt, but I'm trying to understand a couple of things to prioritized my Total Debt Annihilation.

I've been doing really good, but I like numbers and math and I'm trying to figure out what my actual utilization is. So, questions:

edit: I answered the now-spoilered questions on my own thanks to Credit Karma. Once the credit bureaus catch up to all the payments I've recently made, I'm utilization is going to whip down past and below 30% so I'm pretty excited about that. The only thing I'm concerned with now is the student loan question.
1) I have 2 closed credit card accounts. No latenesses or anything (I'm 100% golden on my payments) but these accounts have been closed for one reason or another. How does that impact utilization if there is a current balance? Does the credit line get removed from both the numerator AND denominator on the credit bureau side, or does my utilization just go to 100% for that particular card until it is fully paid off?

2) Do loans factor into utilization? How does that work? Is it always at 100% until fully paid off, or is the denominator the original balance when borrowed, or what?

I also have an age-of-credit question. My student loan from college still exists. It's very tiny and I've been pretty much paying the minimum forever. I'm very worried about eliminating it because my student loan is 19 years old. After some bad decisions in college, I eschewed credit cards for a very, very long time thereafter so my next oldest credit card is only about 9-10 years old, I think.

What should I do? Hold on to my student loan for awhile longer? Just pay it off and be done with it? Don't worry about what interest may end up costing me in the long run - it's not much and I'd rather just focus on what impact this may have on my credit score in a holistic sense.

Thanks for any info or advice.

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  • DaenrisDaenris Registered User regular
    I don't believe loans factor into that. Credit utilization rate is supposed to be based on open/revolving credit lines, so credit cards, home equity lines of credit, etc. Loans shouldn't affect that.

    NightDragon
  • AngelHedgieAngelHedgie Registered User regular
    Daenris wrote: »
    I don't believe loans factor into that. Credit utilization rate is supposed to be based on open/revolving credit lines, so credit cards, home equity lines of credit, etc. Loans shouldn't affect that.

    You'd think that, but I saw my credit score literally drop 50 points when I paid off my student loans.

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  • DaenrisDaenris Registered User regular
    edited July 7
    Daenris wrote: »
    I don't believe loans factor into that. Credit utilization rate is supposed to be based on open/revolving credit lines, so credit cards, home equity lines of credit, etc. Loans shouldn't affect that.

    You'd think that, but I saw my credit score literally drop 50 points when I paid off my student loans.

    Could have been age of accounts since student loans are frequently among the oldest people have. Or number of accounts if you had a bunch of different loans. I'm definitely not suggesting student loans don't affect your credit score, but they won't affect it for credit utilization, because they aren't revolving credit accounts.

    I don't really want to pull up an official credit report right now, but Credit Karma has my utilization at 7%. If student loans were figuring into that it would be *much* higher, regardless of whether it used original or current balance as the denominator.

    Edit:

    This is from Experian: https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/

    "Credit utilization rates are based solely on revolving credit — essentially, your credit cards and lines of credit. The rates do not include installment loans like your mortgage or an auto loan. Those factor into your credit in a different way."

    Daenris on
  • ThegreatcowThegreatcow Lord of All Bacons Washington State - It's Wet up here innit? Registered User regular
    edited July 7
    I do believe the history is playing a factor there. When my mom actively worked in the banking industry, she broke down the major factors that affect your credit score. Of course this varies slightly between credit bureaus, but generally holds true across all three:

    -Payment History (ie how good are you at paying on time due date after due date)

    -Past Due Incidents (tying into the first one, how often you've had 30 days past due, 60 days past due 90 days past due etc incidents on your accounts)

    -Total Utilization of your available credit (As mentioned above, the general target is sub 30% but I've also heard It's better go well below that if possible, closer to 10-15% ideally)

    -Frequency of New Credit Applications (ie "Hard Hits/Inquires"), multiple different applications for different types of credit (house, car, credit card, line of credit) that happen in a short window of time like 3-6 months can cause a major negative spike in your overall score)

    -Average Age of your open credit lines (Tying into above, how long have you had a line/account open. This is where closing old, not used credit lines can actually ding your score noticeably as the Average Age of your credit accounts has suddenly gotten smaller, so in the eyes of the credit bureaus, you've had credit for a "shorter" time as a result. However I would still pay off something like a student loan, even if it does mess up the average age of your profile as continued good payments and low utilization of your remaining accounts should cause your score to bounce back within a few months. )

    -Past Major financial incidents (ie bankrupty, divorce etc)

    -Credit Activity (This one is a bit more nebulous and I never got a straight answer on this one, but you can actually have credit lines have a "lesser" impact on your overall score as credit companies will see something like a "backup/emergency credit card" that sees no utilization and its impact on your overall score can actually decrease due to lack of activity. Generally speaking however, you're more likely to have the issuing bank simply close the card preemptively due to lack of use before this really becomes an issue)

    Hope this helps and good luck on getting your debt cleaned up! :D

    Thegreatcow on
  • DrezDrez Registered User regular
    edited July 7
    @Daenris @AngelHedgie Yeah, that has to be age of accounts which is my primary concern with the Student Loan. My Student Loan is 19 years old. My next credit line? About 8 years. My average age of accounts is much lower than that. I'm very worried about the impact of what will happen when my student loan drops off my report. So I'm wondering if I should even bother. Why not pay 90-95% of it and then pay off the last $100 or whatever on my one-hundredth birthday. Is there actually any good or positive reason for me to fully pay if off, other than not paying any interest on it any longer?

    I guess at some point, my minimum payments will outstrip interest so I'll either have no choice except to pay it off or carefully balance my accrued interest which seems silly.


    @Thegreatcow According to the three credit bureaus, I have zero late payments in my history. No 30/60/90 days at all, all 0/0/0 late reports in those buckets. Way back in my college days I had issues but that was millennia ago and isn't a part of my reported history anymore. I checked this using Credit Karma and Experian (I'm now signed up for both). Some hard inquiries, but that's just a temporary setback. Everything else is good or excellent, just my utilization isn't great. Actually, as of this writing, I am below 30% once all my cards report to all my credit bureaus. No divorces. No bankruptcies. I've had some activity on all my cards within the past year but I doubt that will continue, I do want to consolidate my spending.

    Regarding the student loan - another friend shared the same advice. I'm just worried since it's so disparate. Going from 19 years as my oldest account to 8-9 sounds brutal.

    @AngelHedgie if you don't mind me asking - did your credit bounce back up after 3-6 months? 50 points sounds like a real problem for me.

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  • DaenrisDaenris Registered User regular
    If it were me I'd just keep paying the minimum payment until I had no choice but to pay it off. If it's a small balance there's not really much good reason to pay it off sooner, and definitely a downside to doing so given the age of it.

  • ThegreatcowThegreatcow Lord of All Bacons Washington State - It's Wet up here innit? Registered User regular
    Yeah I mean, not gonna lie, you will probably suffer a ding of some kind once that student loan gets paid off simply on account of the history messing with your average age of accounts, but unless you have something major lined up to purchase via credit around the time you'll be paying it off, it should even out after a couple of months once the credit bureaus see your continued good payments and low utilization. It's really tough to say with these kind of things.

  • MugsleyMugsley Registered User regular
    What does your average age of accounts drop to after the loan?

  • DrezDrez Registered User regular
    edited July 11
    @Mugsley Sorry, was a super busy day yesterday and didn't get to respond until now.

    The average age doesn't take as much of a hit, but according to Credit Karma and a lot of other credit monitoring services, oldest account is significant in and of itself.

    Anyway, if I pay off my student loan:

    Average Age goes from 4 yrs, 6 mos (54 mos) to 3 yrs, 11 mos (47 mos)
    Oldest drops from 19 yrs, 1 mo (229 mos) to 8 yrs, 4 mos (100 mos)

    I'm thinking, maybe I'll just slow play it for the next couple of years until I'm ready to buy my multi trillion dollar mansion right in the middle of NYC first so I can get the multi trillion dollar loan more easily. Then after that I can pay off the student loan.

    edit: Added more info.

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  • DrezDrez Registered User regular
    I can say, with glee, that my utilization is currently literally at a little over 15% and once this one payment goes through it will be below 10% so my goal is more or less realized.

    The only thing is I need numerous credit cards to report to the 3 credit bureaus to get the full impact. As of now, Credit Karma and Experian (which covers reporting on the three bureaus) are showing my utilization at 59% right now. In jumping from 72% to 59%, my score went up 47/48 points depending on the bureau. So I expect to see a nice change once my utilization drops below 10% which I think is the "super excellent" threshold for credit utilization. They usually recommend using less than 30% but apparently less than 10% is even better regarded.

    Anyway, I'm psyched.

    One thing I did not realize was that at some point, PayPal Credit went from not reporting anything to the credit bureaus to reporting to the credit bureaus so realizing that definitely solved some mathematical mysteries for me.

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  • MugsleyMugsley Registered User regular
    What's your plan for major purchases in the near future? If you're not planning on something like a car or house in the next 3-5 years, just get rid of the loan. It will still show on your history for about 6 or 7 years before it drops off; it just won't be active.

    Don't carry debt just because of your credit rating.

  • DrezDrez Registered User regular
    edited July 11
    Wait, I'm confused. If it'll stay on my account, do you mean it'll still count in my credit age scoring? Or am I misunderstanding you?

    I'm 40 - there's a lot up in the air right now, but I plan to make some significant changes to my life in the next few years, maybe even some sooner than 3-5. My lease is up next July. I won't be in a position to buy a house then but I make a decent wage and once I finish paying off my debt here and get my needed dental work done, I'm going to lean hardcore into saving money.

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  • MugsleyMugsley Registered User regular
    Whether good or bad, items on your credit report don't fall off for 7-10 years (I got the timeline wrong above). So even if you pay off the loan, it'll be part of your report for that long; though at that point it will show as paid off.

    Check this Experian page for some details.

    https://www.experian.com/blogs/ask-experian/will-paying-off-my-student-loans-hurt-my-credit-score/

    Drez
  • Pixelated PixiePixelated Pixie Cupcake Sorceress Registered User regular
    Drez wrote: »
    Wait, I'm confused. If it'll stay on my account, do you mean it'll still count in my credit age scoring? Or am I misunderstanding you?

    It can go both ways. FICO considers the average age of all accounts, open or closed (until they drop off your credit report 7-10 years after being paid off), but VantageScore 3.0 considers the average age of open accounts only. So paying off an old account can actually lower your VantageScore.

    VantageScore is used by fewer banks/lenders than FICO, fwiw. But it does seem to be growing in market share.

  • DrezDrez Registered User regular
    Mugsley wrote: »
    Whether good or bad, items on your credit report don't fall off for 7-10 years (I got the timeline wrong above). So even if you pay off the loan, it'll be part of your report for that long; though at that point it will show as paid off.

    Check this Experian page for some details.

    https://www.experian.com/blogs/ask-experian/will-paying-off-my-student-loans-hurt-my-credit-score/

    Thank you @Mugsley

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  • DrezDrez Registered User regular
    Drez wrote: »
    Wait, I'm confused. If it'll stay on my account, do you mean it'll still count in my credit age scoring? Or am I misunderstanding you?

    It can go both ways. FICO considers the average age of all accounts, open or closed (until they drop off your credit report 7-10 years after being paid off), but VantageScore 3.0 considers the average age of open accounts only. So paying off an old account can actually lower your VantageScore.

    VantageScore is used by fewer banks/lenders than FICO, fwiw. But it does seem to be growing in market share.

    Ah, that explains the contradictions I've been seeing. Thank you, @Pixelated Pixie!

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