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Benefit of large $ SSL for utilization?

Senior Contributor

Benefit of large $ SSL for utilization?

I was reading another thread on here where someone said that their rent recently started reporting as an installment loan on their credit report.  I don't know if this is their only installment loan, but if it is, naturally it would start at 100% utilization and work its way down by 1/12 or a little over 8% per month.

 

The discussion has come up in the past as to whether or not there's any benefit to doing a SSL at a dollar value > $500.  We all agree that for FICO scoring purposes there's zero difference between a $500 loan and a $50,000 loan, as it's installment loan percentage that matters with respect to scoring.

 

That said, in certain instances, couldn't a greater value SSL help installment loan utilization?  Perhaps the individual referenced above has their rent showing around $10k for the starting balance of the loan (just making up a number here).  If one were to add a $10k SSL and pay it right down to the usual $45 or whatever, overall installment loan utilization drops to 50% and would be less than 50% after 1 payment is made on the rent account.  Aggregate utilization landing in the 40's verses the 90's I would think would be a favorable look if a mortgage is on the horizon.

 

I think a more common example would be with an auto loan, as those are talked about much more frequently than rent landing on a credit report. 

7 REPLIES
Moderator

Re: Benefit of large $ SSL for utilization?

I was under the impression, and I could be completely wrong as this certainly isn't my area of expertise, that overall utilization on installment loans isn't a factor in FICO scoring.  Isn't the scoring limited to the percentage of each installment loan vs some overall criteria?

Message 2 of 8
Senior Contributor

Re: Benefit of large $ SSL for utilization?


Irish80 wrote:

I was under the impression, and I could be completely wrong as this certainly isn't my area of expertise, that overall utilization on installment loans isn't a factor in FICO scoring.  Isn't the scoring limited to the percentage of each installment loan vs some overall criteria?


From what I've read on here, installment loan utilization is treated very similar to revolver utilization in that overall utilization is the biggest factor followed then by the individual utilization percentages.  If I'm incorrect on that, someone please let me know as what I proposed in this thread wouldn't matter if aggregate installment loan utilization doesn't matter.

Message 3 of 8
Community Leader
Senior Contributor

Re: Benefit of large $ SSL for utilization?

Hi Irish.  The received wisdom is that total installment utilization (all loans lumped together) is the single biggest factor related to installment debt. 

 

There are some conjectures that particular loan types might get a benefit from paydown at a higher level.  E.g. if your sole loan was a mortgage, you might be able to get all your installment-related scoring points by paying it down to < 69% -- contrasted with someone who's sole loan is a personal loan (where he needs to get it to < 9%).  If those conjectures are true, then it becomes even less clear how FICO would handle a profiled with different loan types: perhaps to get the maximum you'd treat each one separately (mortgage < 69%, personal < 9%).  But if you have all auto loans, say, or all personal loans, or all student loans, then its just the total aggregate utilization that is supposed to matter.

 

There are other conjectures out there too: e.g. that for an open loan that is 25+ months old you don't have to pay it down quite as much.

 

What is definitely known is that when a person has a small personal loan at < 9%, and then adds a huge loan like a mortgage, he loses almost all his scoring points.  Thus the inference that total utilization is the biggest driver.

Message 4 of 8
Community Leader
Senior Contributor

Re: Benefit of large $ SSL for utilization?

Hi BBS.  Yep, having huge original debt that is almost entirely paid off helps you more than tiny original debt that is almost entirely paid off -- in the situation where you are about to add a new unpaid loan. 

 

EXAMPLE:  100k in student loans on which you owe 5k, versus a single $500 SS loan on which you owe $25.  The installment util is the same (5%) and therefore so is the scoring benefit.  But if you then add a 4k loan, the guy with the big SLs will still be at < 9% whereas the 4k loan will raise the other guy's IU to almost 90%.

 

Some people have suggested trying to "ladder" a series of 10k SS loans, so that you can create a huge amount of paid off open debt.  That sounds like a good idea but in practice it would be a lot of work and would draw attention to the games you are playing with the SS loans.  And remember the SS loan technique actually harms the lender (they spend more managing the loan then they get in interest from the borrower).  And if you do all the math you'd still only get half of the 30 points you typically get, so again a lot of work for not that much benefit, and the benefit would only kick in when you got medium sized loan, like a car.

 

That's my take on it.

Message 5 of 8
Moderator

Re: Benefit of large $ SSL for utilization?

Thanks for the info fro both of you.  Great stuff.

Message 6 of 8
Senior Contributor

Re: Benefit of large $ SSL for utilization?

Good feedback above CGID. 

 

I was sort of thinking of this from the perspective of someone that's looking toward a mortgage say 2 years from now.  He may know that 6-12 months from now he's going to take on an auto loan.  Perhaps he has no open loans currently.  In this situation, it would seem feasible that the technique I suggested could help this individual.  By scoring a $20k SSL, if this person took on a $20k auto loan a year from now he'd be rocking 40% or so installment loan utilization a year later when applying for a mortgage.  Without the large SSL in place, he'd be at maybe 85% installment loan utilization on that installment loan.  I'm not sure how this would impact mortgage scores, but it's possible it could be 10-20 points I'd think?  I'm not really sure.

 

I don't think that there are a lot of situations where the point of this thread would really matter much, but in the illustration above I think it could work.

Message 7 of 8
Community Leader
Senior Contributor

Re: Benefit of large $ SSL for utilization?

I would really like some definite answers from multiple testers/profiles on how the mortgage scores respond to installment utilization.  We thought we knew the answer (EQ/TU aka FICO 04 = no benefit, EX aka FICO 98 some benefit) but then SouthJ reported results that seemed to contradict that.

Message 8 of 8