Confused on Credit Scoring

[Anonymous]

I monitor my credt scores constantly to ensure all is correct.  My credit score has been in the 800's for quite sometime.  This month, as planned, we paid off both of our auto loans as we are considering purchasing a new home, and wanted an excellent loan to debt ratio to work with for qualifying. (our current home has no mortgage).  To my shock - paying off my car loans early has devastated my fico scores across the board, which will impact my ability to get the best interest rates.  Currently, I use my credit cards minimally - and pay off the balances each month.  I have cleared all balances, meaning I'm debt free, yet my score has plumented into the mid to high 700's based on  bureau. 

Do I need to go out and buy something major in order to restore my credit scores?  I think this is the craziest thing I've ever seen.  How do I get myself back up to 820+  where I was?? 

[SouthJamaica]

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@Anonymous wrote:

I monitor my credt scores constantly to ensure all is correct.  My credit score has been in the 800's for quite sometime.  This month, as planned, we paid off both of our auto loans as we are considering purchasing a new home, and wanted an excellent loan to debt ratio to work with for qualifying. (our current home has no mortgage).  To my shock - paying off my car loans early has devastated my fico scores across the board, which will impact my ability to get the best interest rates.  Currently, I use my credit cards minimally - and pay off the balances each month.  I have cleared all balances, meaning I'm debt free, yet my score has plumented into the mid to high 700's based on  bureau. 

Do I need to go out and buy something major in order to restore my credit scores?  I think this is the craziest thing I've ever seen.  How do I get myself back up to 820+  where I was?? 

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No that wouldn't help you at all.

Here's all you need to do:

1. Let all of your credit cards except one report a zero balance when the statement cuts; let the other one report a balance of from 1 to 5% of the limit.

2. Take out a $500+ savings account with Alliant Credit Union, then take a share secured loan secured by the savings account. Then immediately pay the loan down to 9% of the face amount of the loan and disable autopay.

Within 2 months you'll get a bunch of points back.

BTW if what you're monitoring is FICO 8 you might not be getting a clear picture of your mortgage scores, which are different.

[Anonymous]

What SJ said.

Make sure that, for the one credit card that does report a balance....

      *  It is a true credit card (not a charge card)

      *  It is not an AU card

      *  The amount owed (on the statement) is at least $5.

Then make sure that you buy something small each month on that one card.

A slight caveat to SJ's advice.  The 1-5% utilization considers the credit limit on all of your credit cards together.  You don't need to make sure it is < 5% of that particular's card's credit limit.  (SJ probably meant total U -- I am just making sure you understand the difference.) 

Note too that FICO rounds up, so that a utilization of 0.3% is rounded up to 1%.

Finally, if you want more detailed guidance on or explanation of the Share Secure Loan technique with Alliant, you can find that here.  You only need to read the first few posts in that thread:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

Alliant reports its loans to the credit bureaus on the last day of each month.  If you get started soon on the Alliant loan, you may be able to have it in place by the time Alliant reports on Oct 31.  Otherwise you'll need to wait another 30 days.

[Anonymous]

PS.  We may be able to help you a bit more if you tell us the following:

(1)  How fast do you need to get your score back up?  E.g. does it need to be back up 7 days from now -- if not you are sunk?  Or do you have 30 days?  60 days?

(2)  When was the last statement date on each credit card that you have?  If you tell us those we may be able to guide you as to which card to choose to put the small positive balance on.  (If we know the last statement date, it will enable us to guess which one will get on to your reports the fastest.)

(3)  When you say that your scores were "devastated" -- what tool are you using to pull your scores?  Are these FICO 8 scores?  Your FICO 8 scores are not the ones mortgage lenders will be using.  The mortgage flavor of FICO is not generally harmed by an early payoff of installment loans (for TU and EQ) -- so the TU and EQ scores may be in better shape than you think.  Remember too that you don't need scores in the 800s to qualify for best rates on the loan itself, best deals on PMI, etc.

[bettercreditguy1]

Don't fret over not being in the 800's or having some unpaid cc balances when you apply. Financial institutions vary on what range of Fico scores  qualify for their best rates. For us, 750 or higher qualified us for the best  tier. Generally they look at total outstanding debt, DTI, payment histories, and total number of lates. The killers are collections and judgements. During your pre-qualifying steps, the institution will inform you of little changes they want accomplished before sending your  loan to the underwriters for approval. Hope this helps, good luck in your newest journey.

[Anonymous]

For what it is worth, I really like SJ's advice about getting one card to report a small balance.  That really will give the OP a substantial boost across all of FICO's scoring models, including the mortgage models. 

PMI insurance sometimes needs a higher FICO score for the best deals (or so I am told).  Adding the one card with the positive balance (and then getting it to report) would be such an easy fix there is just no good reason not to go ahead with it. 

Hopefully we'll hear back from the OP soon and the folks here can walk him through the steps to repair his problems.  SJ was spot on with his two-part solution.  The only thing we don't know is the OP's timeline -- e.g. had he picked out the property he wants to buy, and he needs to get his scores back up in ten days?  Or does he have two or three months?

[Anonymous]

Of course SJ, Dixie and better credit are on point

I'll just add plainly since nobody seemed to just outright say WHY....

Yes of course the solutions are on point and wonderful... however if the OP doesn't get the ' how come' the confusion will exist and may easily repeat itself and not be passed on properly within the family.

I like showing (not to rain on the OP, by any means) clients rebuilding or trying to 'understand' WHY that have 520 credit scores that folks with 820s oft times have the same issues and questions... because the details can be tricky and confusing to anyone, credit score notwithstanding.

Anyway the issue, that's being addressed and was most likely thrown off was the credit mix, the credit 'juice' of having and maintaining installment accounts AS WELL AS revolving CC accounts @ the same time.

Once those two car loans closed, the 'computer' based scoring model took back the 'juice' given for balancing or juggling open installers along with open active revolvers....these shocks folks all the time.

They finish a car or home loan and the moment the loan is over the scoring model recalculates without the bonus of managing said account that is now longer and the score drops.
Although we humans might feel hey the car notes gone that means extra money seems like that should enhance one's score but not the way the program is written, again score wise only. The profile overall may be a better risk and offered better terms with a slightly lower score because now the household DTI is more favorable because of there being less expenses to consider.

The 'trick' of the trade being deployed by setting up the small secured loan and the low down deal is all about massaging the scoring model to see an 'open' almost paid off (but not paid off) installment account.

The dollar amount isn't important that it exist, is open and the % of debt/ loan ratio appears near pay off is all that matters.... you're manipulating the computer
And holding the pose until you garner the credit account you seek...car/ mortgage etc

Best of luck

PS as mentioned 800 isn't required most lenders will top out the best available rate for mortgages @ 760, maybe 780 but there is no super duper better than that rate ( they want a profit) cars can top at 720 , 750 for sure....800s are basically for 'show' and helps our ego but rate breaks stop in 700s for sure.

[bettercreditguy1]

A couple other thoughts. When a lender looks at your credit file and they see your age and a thin file, they ask questions, why, what happened, was it a bankruptcy that may have aged off already, a divorce, hospital bills, etc. Yes they know you could have had bad accounts removed as well. Their service is to lend money with the least amount of risk and follow up  admin time, thus lower interest for you. I agree you want a good looking file, however it does not need to be perfect.   In my case, I did have 4 total lates with 3 consecutive late months. Those payments were 30 days late,skip a month then 30/60/90. I was asked about this event during the loan process, explained it to them, as it was about four years before applying. I received their lowest mortage rate at approval. 

[StartingOver10]

OP, check your mortgage scores. You can get them here with the 3 B report. Mortgage lenders use the older FICO scoring models referred to as "mortgage scores" here to differentiate those scores from FICO 8's which are not used by mortgage lenders. The lowest mid mortgage score of the mortgage applicants is the qualifying score that is used. For example, if your mid mortgage score is 750 and your husband's is 744, then the qualifying score is 744 that will be used for your interest rate. Naturally if you are the only one on the mortgage app, then it would be your score that is the qualifying score. 

You still did the right thing by paying off your debt because the metric that is most important for mortgage lenders is your DTI for the amount of mortgage. Your scores determine your interest rate and PMI rate if applicable. 

Once you are in the 760+ range you are in the top tier for both rate and PMI. 

That Shared Secured Loan tip up thread is a good tip. It does two things:  it satisfies the installment loan criteria for mix and it doesn't hurt your DTI because if you follow the instructions and get only a $500 loan and pay it down immediately (as the thread posted shows), there is nominal hit to your DTI (pennies, which are meaningless). 

[Anonymous]

We have a clean record in regards to lates (none) etc and never a BK for sure.. about 15 years ago.. I paid off all my debt and ripped up my credit cards... and found I had to rebuild our credit about 6 1/2 yrs ago in order to do a few things we wanted todo (like buy a new car).  Wasn't really hard to do - as I said I have no negatives... took a few months to get us back on track, but we are now looking to purchase a home which will have a substantial mortgage until we liquidate some property - and I wanted all to be "perfect" - but you are correct, in that my banker isn't concerned about the drop as he sees why - I just didn't want those two car loans to dimish our chances of getting the best interest rate available.  We are going to have to replace our AC (very expensive) on our current property.  Maybe I'll just finance that to get us a credit mix again, and then pay it down quickly.

Thank you for all your assistance -