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Acquired lump sum, what to do to build credit!
May 5, 2016
6:26 pm
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Hello all, I have recently received a lump sum of money which will be able to eliminate my private loans.

The interest rates range from a low of 5.7% to a high of 8.7% with a grand total of roughly $45,000 owed.

Ideally, I would love to pay off these horrible loans while also building credit for myself.

My question is this; what is the most efficient way to pay off the loans with the money I acquired while also establishing some credit for myself?

I understand that paying off in full isn’t beneficial to me credit-wise, but I need to rid myself of these life-sucking loans.

Thanks for much for the help!

May 5, 2016
6:28 pm
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I’m a little confused. Is your question about the order to pay the off or is it a situation where you can pay off a portion of the 45k but unsure of which ones to target?

May 5, 2016
6:37 pm
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Sorry for the confusion. My question is how to go about paying these off. Do I pay $1,500 a month, $2,000? Or do I pay off completely the 8.7% loan ($14,000) first?

All my private loans are from the same place so I am paying $385 a month which incorporates all 6 of the minimum payments.

What is my best angle of attack regarding monthly payments? If that is even a good option.

May 5, 2016
6:45 pm
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Ok… we are on the same page.

Assuming you have the 45k to pay off the loans, I suggest just paying them all off right away.

Take your $14,000 loan for example. Every month that debt costs you over $100 in interest alone! If that money is just sitting in a bank account, you are losing money each month.

The whole point of chasing a good credit score is to be able to borrow money at low interest rates. Why spend hundreds of dollars to chasing that credit score when you could just save the money up front?

However, there are a couple things to consider, once you make those payments, that money is gone forever. If you have other priorities, such as an emergency fund, or other high interest debt, consider those options as well.

Finally, should you not have enough money to pay off all of the debt, your best approach is probably to pay off the high interest stuff first and then carry the low interest debt for a while.

I can’t think of a reason to hold on to debt for the sole reason of helping your credit score. Maybe it is because I hate interest working against me, but in my mind the scale tips to pay it of and live with a minor credit score drop.

Is there another consideration that I’m missing?

May 5, 2016
6:54 pm
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thank up you for the help!

I understand where you are coming from regarding interest, and I am able to pay them all off with a little to spare for emergency etc.

At the end of your last response you mentioned my credit will drop slightly if I pay off the loans in full in one payment?

May 5, 2016
8:33 pm
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There are a number of different factors that can affect your credit score, one of the factors is the age of your oldest account. It is possible that paying off the loan will make your average account age slightly newer and therefore slightly lower your credit score. However, this is a small factor.

From the sounds of things you seem super concerned about your credit score. I’ll add one other thought to your situation. One of the huge factor for any credit approval is your debt to income ratio. For example, if you were to apply for a mortgage, the lender would look at your monthly debt, normally they use the minimum payment on each debt as reported to the credit agencies and compare it to your monthly income. If your income is sufficient to support adding the new debt of the mortgage, you can be approved. Eliminating student loans will greatly improve your debt to income ratio.

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