Does paying off a no-interest loan early help credit scores?
Dear Liz: Two years ago, my husband was denied a revolving $12,000 line of credit. The credit reporting agency indicated that denial was based on “little revolving usage, insufficient or no bank lines, and insufficient open accounts with zero balances.” Nine months ago, however, he was approved for a car loan and received a FICO Auto V2 Score of 808 from the same credit reporting agency. Another credit reporting agency gave him a FICO Auto 04 Score 836. We had wanted to pay cash for this car but thought it would be wise for my husband to improve his credit, so he got an interest-free loan. My husband was recently approved for and obtained a credit card with a $20,000 revolving credit limit. He previously had a card with a $2,000 limit. He will pay off the balances each month. Our question: How long should he wait to pay off the car loan so that the payoff helps his credit and doesn’t hurt it? We don’t like having outstanding debt and have no other loan obligations.
Answer: Occasionally there’s a conflict between doing what’s best for your finances and doing what’s best for your credit scores.
Paying off an installment loan early, for example, normally is good for your wallet since you’re saving money on interest. But this payoff may come with a cost. While the closed account can remain on your credit report for years, contributing positively to your scores, you’ll get somewhat more of a positive impact if you don’t rush to pay it off. The open account will do more good for your scores than a closed account.
In your case, however, there is no conflict. This is an interest-free loan, so you’re paying absolutely nothing for the option of keeping the account open as long as possible. If your primary concern is supporting your husband’s excellent credit scores, consider getting over your aversion to debt and enjoy the free use of the lender’s money.
(OK, it may not be totally free. Buyers who get zero-interest loans often pay more for their cars than those who get market interest rates, according to Edmunds.com. But we’ll assume you thrifty folks bargained hard and really did get free money.)
If your husband can’t tolerate having any debt, he can keep good scores simply by using those credit cards lightly but regularly. The less he uses of his credit limit on the cards each month, the better: 30% or less is good, 20% or less is better, 10% or less is best. Paying the balances in full will ensure he doesn’t have to pay a dime in interest to keep his scores in good standing.
Escaping student loans
Dear Liz: In a recent column, you fielded a query from parents whose son took out student loans in the mother’s name. You wrote, “If your only income is from Social Security and you don’t have any other property a creditor can legally take, you may be ‘judgment proof,’” which means “a creditor wouldn’t be able to collect on a judgment against you.”
I understand this advice was meant for the mom. But could it equally apply to the borrower who benefited from the loan?
In my case, I will be 70 next year and my only income is Social Security. I owe about $80,000 in private student loans and about $80,000 in federal student loans. I can’t afford to pay either loan. Is there hope for me to get out from under this burden by being judgment-proof? Right now, I can’t afford to see a bankruptcy attorney. It is a struggle just to pay the rent and put some food on my table.
Answer: You can’t afford not to see a bankruptcy attorney. Federal student loan collectors have enormous powers to collect, including taking a portion of your Social Security check.
The concept of being “judgment proof” applies to collections of private student loans. Collectors for those loans may be held at bay if you are, indeed, judgment proof. But you really want an experienced bankruptcy attorney to review your situation to make sure that’s the case. Fortunately, many bankruptcy attorneys offer free or discounted initial sessions. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at https://www.nacba.org.
Spousal benefits and Social Security
Dear Liz: I am 65 and recently visited our local Social Security office to apply for spousal benefits. (My wife, who is also 65, applied for her own benefit last year.) I wanted to get the spousal benefit, even if the amount is discounted, so I can let my own Social Security benefit grow. The Social Security office manager advised us that I cannot claim spousal benefits until my full retirement age. You said in a recent column that I can. Who is correct?
Answer: You can apply for spousal benefits before your own full retirement age. But doing so means you’re giving up the option of switching later to your own benefit. The office manager gave you correct information, based on your goal. If you want the choice of letting your own benefit grow, you must wait until your full retirement age (66) to apply for spousal benefits.
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