@trumpet-205 wrote:
@OptimalFICO wrote:
Saving money is always great, but there are various ways of doing that, including short- and long-term strategies. Paying off a loan early can be a good thing. However, I disagree with your assertion that one should not defer a loan nor apply for a loan one doesn't need for the sake of improving one's FICO scores. I feel it's not accurate to make blanket statements about such things. It really depends on individual circumstances, needs and goals.
In my fiancee's circumstances, paying off his auto loan early meant that it no longer helped his FICO scores improve... which is what his FICO scores needed. His scores were borderline, therefore the increase to his FICO scores that would have resulted from maintaining the loan instead of paying it off, could result in thousands of dollars in savings by allowing him to qualify for a better mortgage rate. Savings thousands of dollars by qualifying for a better mortgage rate over 30 years, trumps saving tens-hundreds of dollars by paying off his five year auto loan a year early IMHO.
In my personal case, for example, my FICO scores were over 800. My student loans (installment loans) had been paid off for a long time and were beginning to fall off my CR. Without this installment debt, and having no mortgage, I would be left with revolving credit only on my CR. It is possible to build FICO scores into the 800 range with only revolving credit, but my FICO scores are so important to me I wanted to be sure to maintain them and took out an installment loan I didn't need. I had paid cash for my car, but then refinanced a small portion of it into an auto loan at 1.49% and put the money in the bank. I recently paid off the loan and my FICO scores have increased to well over 800.
Another example would be in the case of long term credit cards with annual fees. My fiancee has a credit card wth an annual fee that he used to help rebuild his credit after BK. Two years ago he obtained a second credit card with no annual fee, but kept the one with an annual fee because it is now his oldest open account. Closing it would hurt his FICO scores. Once he buys a home, he will probably close the account, but for right now he needs the additional FICO points. In my opinion, it's not wise to close "golden" credit card accounts (those that have been open for years and years) with annual fees because they help your FICO scores in several ways. IMHO in various scenarious, it's the cost of maintaining outstanding credit... and can result in greater savings down the road.
A lot of wrong assumptions in your argument. Your first mistake is being too in love with FICO score. Having a good credit report helps reduce interest on loan, not having the best FICO score. FICO score is not everything. For example, are you going to say that a FICO score of 800 with a relatively thin credit file (which does happen, one reason why FICO score is biased) going to get the best interest rate?
As a side note, my TU FICO (not sure which model) provided by US Bank is 742. A good score right? Yet US Bank assigned a 21.99% APR for my CC becuase I have thin files.
Your second mistake is assuming FICO score is a universal credit score. Beside the in-house score more and more lenders are using, there is a lot of FICO scoring models. A mortgage-enhanced FICO scoring model put more emphasis on previous mortgage history and place less "omph" on other things. FICO scores that are on sale here are credit card-enhanced. Just because they are developed by FICO does not mean they are the same.
Your third mistake is assuming that a closed credit card would hurt FICO score. Wrong. A closed credit card stays on your credit report for ~10 years. By the time it falls off your AAoA would have caught up and your second oldest account would've surpassed the closed account. Closing a credit card would have done nothing to your creditworthiness beside short term utilization impact.
Artifically inflate FICO score alone does not determine what interest rate you are getting. A lof of factors also come into play.
Thanks I don't really understand why you seem to be so argumentative and confrontational.. borderline rude even. I understand all of what you are saying, but respectfully, I fear you have misunderstood and are the one guilty of false assumptions if I may say so. As you must know, the FICO algorithims (whichever model) are very complex with intricate subtleties, but a version of one of the FICO scores is used in practically every loan transaction/credit decision. You are right in that I am rather obsessed with my FICO scores. Obviously it is just one of several tools companies use to measure a person's risk, but the importance of FICO scores has evolved dramatically over the last 16 years and is used by more industries as a key indicator of potential future risks. Often times, offers of credit are based solely on FICO scores, which also often determine the interest rate. For example, for conventional mortgage loans right now, one needs a minimum 740 to qualify for the best interest rate. And extra financial costs are often incurred at some elevated level until your FICO score is greater than 760.
Obviously there are several FICO models, and the one FICO developed for mortgage lenders is the Classic FICO scoring model introduced in 1995. The Next Generation FICO model introduced in 2001 was developed for consumer lending purposes (credit cards and auto lenders typically). FICO 8 went public in 2008. The point is that the type of loan and company from which you are requesting credit will usually determine the FICO scoring model used for your loan qualification and interest rate. The difference between the Classic and Next Generation is that the Next Generation model lessens the downward impact to FICO scores from finance companies and is more lenient toward auto and mortgage inquiries. While a Classic score may drop a FICO score 20 points from a finance company, the Next Generation may only drop it 5 points and grants you more time to shop a mortgage or auto loan. I won't go into the FICO 8 score differences because it is not used extensively due to cost prohibitiveness of implementation and the changes it brought to investors, such as lessening the impact of late payments. But not only are there different FICO score models, the FICO credit score also has variations between the three CRAs, which made their own personal adjustments to FICO scores.
In reference to closing accounts, the FICO algorithim looks at various measures to determine "depth." The length of time accounts have been established, but also the average revolving account age. Closing credit card accounts can be disastrous if one is not careful. It could potentially result in a loss of accounts that added many valuable points to FICO scores. Some depth can be built within a short time, but real depth takes years and decades to build. FICO measures not only the average age of ALL open accounts, but also the average age of open revolving accounts. Mortgage and installment loans are treated differently than revolving accounts. Once you pay them off and those accounts are closed, you lose any depth you have built from them. Green accounts are new loans open less than a year. Accounts less than four years of age have no real depth value. Bronze, silver and gold are account designations to identify depth value to your scores. Accounts opened from 4-6 years are considered "bronze" accounts... those opened from 7-9 years are considered "silver" accounts and add more value to FICO scores than bronze accounts... those opened 10 or more years are "golden" accounts that add substantial value to FICO scores. Here's an example: If you have one "golden" credit card that's been open for 10 years, and you open two credit cards and an auto loan within three months, your average revolving account age goes from 10 years down to 3.3. At that point depth has no real value. Your average account age drops even further to 2.5 years. There is great value to building multiple golden accounts among your credit cards. Doing so can help you develop an insulation that protects huge fluctuations in your average account age that can impact your FICO scores significantly. The bottom line is that the more golden accounts you have, the higher your FICO scores. These accounts should not be closed for nearly any circumstance are are worth keeping open and continuing to pay an annual fee if need be. It is wise to target other revolving accounts open for less than 10 years to develop them into golden accounts as well.
Regarding loans, you just can't make the blanket assertion that it is always best to pay off a loan early or to take out a loan you don't need. All or nothing thinking is hardly ever realistic. Like you, I can provide examples where this may be so, but I can also provide several others where this is not the case. For my fiancee's purpose of buying a home, obviously there are other factors that go into qualifying for a mortgage - but he also needs a minimum FICO score of 740 to qualify for the best mortgage rate. This benchmark is determined by his FICO score period, and even a .25% difference results in tens of thousands of dollars over the course of the loan. If I hadn't paid off his auto loan early, his FICO would be beyond 740 by now and the mortgage interest savings of .25% on $500,000 over 30 years far outweights auto interest of 1.99% over 5 years. Everyone needs to make such decisions for themselves based upon their own individual financial circumstances, needs and goals.
