I almost made a mistake because of Credit Karma. I was going to do something completely unnecessary and even wrote about how it might be a good idea. Obviously, I’m not going to post it now, but I almost did. Thankfully, I did a lot more digging and fact checking before I posted it and that led to this lovely and informative post.
So I can’t let Credit Karma take all the blame and the mistake isn’t that big. I tend to be a bit melodramatic. A lot of the blame goes to me for not seeking out more information initially and for quickly jumping to conclusions. However, I can see a lot of people making this mistake and I have seen people talking about doing what I was going to do in online forums.
The mistake I almost made was leaving a small balance on my last student loan instead of paying it off completely next month. I’m sure you’re wondering why I wouldn’t want to pay it off completely and be rid of the darn thing. My ill-conceived plan came from my knowledge of credit scores according to Credit Karma. Credit Karma advertises itself as a way to get your credit score and credit report for free. That is somewhat true. You can view your monthly credit report from two of the three credit bureaus for free which is awesome considering that in the past the only way to access them was to get a free one from each of the 3 bureaus yearly and any more than that had to be paid for. But the free credit score part of Credit Karma is a little misleading.
Credit Karma does give a credit score for free, but it isn’t the FICO score we all have heard of. People online have called credit scores from Credit Karma and similar sites FAKO scores. I always knew that the scores listed on free credit reporting sites weren’t always accurate to the FICO scores that lenders use to decide if you are a candidate for their loans or credit cards. Credit Karma uses a different scoring model called Vantage Score instead of FICO. What I didn’t know was that all of the credit score factors that Credit Karma preaches about, not only when explaining your score but also in their blog, aren’t really true to FICO score and FICO is what lenders use most.
I’m not going to go into detail about all of the factors that make up a FICO score and a Vantage Score. I might save that for later. I will talk about which factor made me consider leaving a small balance on my loan: average credit age. Credit Karma explains all of its factors and the average credit age is calculated with only the open accounts which seemed unfair to me since it was like I was being punished with a shorter credit age simply because I paid off my student loans like a responsible person. Then, I started to notice that my FAKO credit scores with sites like Mint and credit.com used both open and closed accounts when calculating average credit age. So I did some digging and was still left unsure of the correct answer.
That led me, the frugal queen, to purchasing my FICO scores from myfico.com, which is the most reliable source to all things FICO. I paid my $29.95 + taxes (I used Ebates for $5 cash back and my Discover card so I could get even more cash back because I’m a cash back earning frugal queen) and I learned a lot about my FICO score. I learned about each of the factors that affect it, played around with the score simulator to see how my future actions will affect my score, and I got to see my score for all of the FICO models. Once again, not going into details in this post, but I will talk about what I learned in relation to my paying off my student loans.
Paying off student loans will reduce the amount of debt you have which is always a good thing. It will still be calculated in your credit age whether the account is opened or closed. Closed accounts will factor into your credit score for 7-10 years after being closed depending on your history. The only way that paying off your student loans negatively impacts your score is by changing your credit mix. Credit mix accounts for 10% of your FICO score. Lenders like to see mixture of active revolving accounts (credit cards) and installment loans (student loans, auto loans, mortgages). If your student loan is your only open installment loan and you close it, your credit score could drop. However, the score drop should be small since credit mix is only a small factor of your score. In fact, amount of debt accounts for 30% of your FICO score and is the second highest factor in calculating your score. So, lowering your amount of debt trumps trying to have a good credit mix. Don’t focus on a low impact factor like credit mix and focus on high impact factors like having a good payment history and a low amount of debt.
I still love Credit Karma. I get to monitor my credit report for free and get an estimate of my credit score which is useful as inaccurate as it may be. I prefer that to paying a monthly fee for a FICO score. MyFICO has a lot of great perks, accurate scores, and is very informative, but paying for it every month isn’t worth it. I am happy to pay for my one month and cancel my membership since I learned a lot from it. Any more than that isn’t worth it. Especially since I get a less detailed, yet very real FICO score from Discover each month with my credit card bill. But thanks to myFICO, I now know more about how my credit score is calculated and I’m no longer considering the dumb idea to leave a small balance on my student loan. I can’t wait to make my final student loan payment next month.