Personal Credit: Best way to pay back $1,000

Factual Questions
1

So let’s say I owe $1,000 in student loans and in general have very good credit. Which scenario will improve my credit rating:

Scenario A: Pay back the $1,000 in one lump sum (assume I have enough in my bank account to cover it and not have it negatively impact my finances).

Scenario B: Pay it back in monthly installments of $180 over a period of 6 months.
My thinking is, if I go with scenario A, the benefit would be that I wouldn’t have to pay any interest.

But is it possible that if I go with scenario B, even though I’d have to pay back about $25-30 or so in interest overall, it might improve my credit rating and therefore be the smarter choice in the long run?

2

I can tell you what my experience is.

In the last year or so I’ve been obsessively watching my credit score, which is on the border between fair and good.

Getting rid of all of my credit card debt did a LOT to boost my scores, but paying off my student loans over time has done literally nothing to change my score. My credit score has literally not changed one single point in the five months since I paid off all my credit cards.

Remember though that interest on student loans is tax deductible, so it ends up costing you less than it seems at first.

I say pay it off slowly, despite my own experience, since once you’ve sunk money into a student loan you can’t ever get it back without applying for a whole new loan. Unless you already have about 6 months worth of expenses saved up and socked away, pay it off over time, but pay more than the minimum.

3

Thank you drewtwo99! That was really helpful advice. I have about $480 left and am tempted to just pay it off now, but that’s a good point about having additional security for a longer period of time. I’ll keep paying it off at $180 for the next 3 months.

4

But that will not matter if the OP doesn’t itemize his/her tax return.

5

Hmm… well maybe I used the wrong word then? It must be a tax credit. Because I definitely didn’t itemize (took standard deduction), but I definitely took advantage of declaring interest paid on student loans.

Anyhow, looks like the OP has only a very small student loan so the comment about interest is pretty irrelevant.

6

No… 1040 Line 33. Tuition itself is also not on Schedule A, except for specific things like work-related education.

7

Also, in regard to the student loan deduction/credit/whatever, if your income exceeds a certain threshold you are ineligible (for 2011, the magic number was $75k). I learned this the hard way several years ago when my annual raise ended up turning into a pay cut because I was suddenly too “wealthy” for this and some other tax benefits.

[insert string of expletives here]

8

Its:
Single, HOH,QW $60k-75k: reduced
$75k+ gone

MFJ $120l-150k: reduced
$150k+ gone

Also: I think you can deduct it until its paid off. IIRC, they used to only limit you to deductions for 5 years, after which you were SOL.

9

That kind of sucks that your raise ended up meaning that you took home less. But you’re doing pretty well overall so hopefully you don’t feel too jaded about having to pay more taxes.

BTW, I’m not too far from that 75K mark myself, so in a couple years I might be in the same situation as you!