Wednesday, March 26, 2014

Debt to Credit Ratio: Student Loan Issues AGAIN


     In my previous post, "Credit Card Usage", I touched on the percentage of your credit card debt to your actual credit card limits and  how it could affect your credit score. I showed a chart from Credit Karma on how you are graded by how much of a balance you carry on your credit cards. What I wasn't thinking about was the percentage of debt to credit on my installment loans.

     Below is a snapshot of my credit report from Equifax as it stands today.

Latest Credit Summary

Your Credit Summary highlights the information in your credit file that is most important in determining your credit standing by distilling key credit information into one easy-to-read summary.

CREDIT REPORT as of 

Open AccountsTotal#BalanceAvailable Available credit does not include accounts without a credit limit, such as mortgage or installment accountsCredit Limit Credit Limit includes the high balance for accounts without a credit limit, such as mortgage or installment accountDebt to CreditMonthly Payment Amount Monthly Payment Amount includes the amount owed per month on all accounts due on a monthly basisAccounts with a Balance
Mortgage0$0N/AN/AN/A$00
Installment6$60,169N/A$56,488107%$4556
Revolving7$2,441$3,059$5,50044%$1547
Other0$0N/AN/AN/A$00
Total13$62,610N/A$61,988101%$60913


     
     As you can see, my revolving credit ratio is 44%. This equates to a C grade when you refer to Credit Karma's website. But my installment loans ratio is at 107%. These loans include the loan for our van and my student loans. This puts my total debt to credit ratio at 101%.

Next is the snapshot of Sheree's from today.

Latest Credit Summary

Your Credit Summary highlights the information in your credit file that is most important in determining your credit standing by distilling key credit information into one easy-to-read summary.

CREDIT REPORT as of 

Open AccountsTotal#BalanceAvailable Available credit does not include accounts without a credit limit, such as mortgage or installment accountsCredit Limit Credit Limit includes the high balance for accounts without a credit limit, such as mortgage or installment accountDebt to CreditMonthly Payment Amount Monthly Payment Amount includes the amount owed per month on all accounts due on a monthly basisAccounts with a Balance
Mortgage0$0N/AN/AN/A$00
Installment1$18,566$2,530$21,09688%$4551
Revolving12$5,418$12,082$17,50031%$5929
Other0$0N/AN/AN/A$00
Total13$23,984$14,612$38,59662%$1,04710








    
     Her revolving credit ratio is 31%. This equates to a B grade on Credit Karma. Her installment loan ratio is at 88%. This only includes our van loan. This puts her total debt to credit ratio at 62%.

     My credit score is lower than hers. So much so that I have been looking at every nook and cranny of our reports to try and find what the major differences are.

     The debt to credit ratio is one major thing that I have noticed that is really holding me back. Specifically the student loans in my installment loans section. I am on what's called the income based repayment (IBR) plan with my student loans. They take your adjusted gross income from the previous years tax return and your family size to determine how much you have to pay towards your student loans. You have to re verify this every year. After 25 years (10 years if you work full time in a public service organization) the balance on your loans will be forgiven. For the past 1 1/2 years I have not had to pay anything towards these loans. This has been a blessing, but now I may have found the curse.

     While I do not have to pay anything towards these loans, the interest accrued on these loans is being added and submitted to the credit bureaus. This is causing my debt to credit to look inflated in the installment loans section which I believe is causing my credit score to be lower.

     So now I am in a catch 22 again with the government. Do I continue on with the IBR plan and continue to have my credit report have this inflated debt to credit ratio or do I start making payments on these loans, even though I'm not required to, with the hopes of lowering this ratio and increasing my score? I know that over time paying down my van loan and credit cards will lower that ratio, but the interest in the student loans will continue to be added. Over a 25 year period this could really add up and inflate that ratio to astronomical proportions.

     I believe what I should probably focus on doing is paying down the interest part of these loans and continue to at least pay the interest on them every year. The interest is tax deductible and it will help my credit score by lowering the debt to credit ratio.

Any thoughts on this?

And the Saga continues...