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Debt Limits and Your Credit Score

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Anonymous
Not applicable

Debt Limits and Your Credit Score

Hi All,

 

I'd like to improve my credit score and am wondering of the impact of my debts on my score.

 

Background:

 

I graduated college in 2010 with approximately 50k in student loan debt. To date, my balance now sits at a little under 32K. In total I have 9 loans that make up this 32K balance. Every loan is in good standing, and has been for the life of the loan.

 

The caveat to this is that some of the loans have a higher amount owed than the original balance. I'm on IBR and concentrate large monthly payments on my loans with the highest interest rates. So, some of the slightly smaller loans (in terms of interest rate) have accrued capitalized interest and now have higher balances than the original loan value. Let me reiterate, they're all in good standing and I've not missed a payment since I began the repayment period.

 

 

Question:

 

In factoring my debt for my score, does FICO look at only the entire debt load collectively, or do they also look at each individual loan? Since I'm in good standing and have paid off a large amount of the debt, everything looks good from that standpoint. However if they look at each individually then several of my loans may look bad since the amount owed is larger than the original amount.

 

I could take a month or two and an bring all the loans down to their original amount or less. I just don't know if that's actually worth doing.

 

Other information

Current EQ: 680

Approx Gross Income: 50K

Reason for credit score increase: Auto purchase within the next year, want best financing rate possible.

Misc.: Score may increase slightly in this time period due to two baddies falling off my report, as well as two inquiries.

 

 

Thanks in advance for your help.

 

 

 

 

Message 1 of 6
5 REPLIES 5
jamie123
Valued Contributor

Re: Debt Limits and Your Credit Score

Welcome to the forums!

 

Your question is kind of obscure because your situation doesn't happen very often so people don't discuss it much. I think that most people wouldn't even recognize it as a problem because it fixes itself over time. If you notice, there isn't much discussion about installment loans here because it is very difficult to determine their actual impact on credit scores. About the only thing we know about them for sure is that it is good for your scores to always have an open installment loan. Your scores will drop when your last installment loan is paid off.

 

Now a bit about debt load...

 

FICO always works with percentages and not dollar amounts. Lenders work with dollar amounts to determine your DTI (Debt to Income) ratios. A $500 four year loan with $50 paid off and a $50,000 four year loan with $5000 paid off mean EXACTLY the same thing when it comes to FICO score calculations. FICO sees both as a four year loan that is 10% paid off. Got it?

 

Now a LENDER will pull your reports and use the dollar amounts and monthly payment amounts to see if you can afford the car payment that you just applied for.

 

FICO scores tell lenders what your chances of repaying your debts are based on past history but not if you can actually afford the loan or new credit.

 

And yes, in my opinion it is hurting your scores to have current balances that are higher than your starting balances. FICO does calculate BOTH individual accounts and all accounts collectively.

 

I use various credit monitoring websites for my personal use in tracking my scores and reports. For the longest time one of the reasons they were telling me my scores weren't higher was "Lack of installment loan history". I took out a four year $500 installment loan at a credit union. As soon as the installment loan reported to the credit reporting agencies my notification was "Installment loan balance is too high". (Sometimes you can't win for losing in these FICO reindeer games!) That notification did disappear after about 2 months.

 

So yes, they are checking the payoff ratio on installment loans. How many points does it mean to your score? Your guess is as good as mine.

 

My suggestion would be to get those over balance accounts paid down to 90% as soon as you can if it doesn't cause you too much trouble.

 

With the age of your credit history it seems that your 680 score is rather low. What does the rest of your credit look like?

 

What baddies are dropping off?

 

How many credit cards do you have? Who are the lenders? How old are they? What is their reported utilization? (balance/credit limit)

 

Where did you get that 680 score from?


Starting Score: EQ 653 6/21/12
Current Score: EQ 817 3/10/20 - EX 820 3/13/20 - TU 825 3/03/20
Message 2 of 6
Anonymous
Not applicable

Re: Debt Limits and Your Credit Score

Thanks for your response Jamie! Below are the answers to your questions and a clarification.

 

My credit history is over 10 years.

 

In my early 20's  (I am now almost 30), I suffered a long bout of unemployment and defaulted on two credit cards. One was for 1K the other for 1.5K. Both of these accounts have been settled, and will also come off due to age next year. I also had a repo that will come off in 2016. Very glaring blemishes, I know. Unfortunately, there wasn't much I could do about it at the time.

 

I have an AMEX Gold card, a Cap1 QS (4.5K), Barclay Reward (1.5K), Discover It (1.7K), and a card with my FCU (1.3K). All of these are a little over 2 years old now.

Message 3 of 6
CreditDunce
Valued Contributor

Re: Debt Limits and Your Credit Score


@jamie123 wrote:

Welcome to the forums!

 

Your question is kind of obscure because your situation doesn't happen very often so people don't discuss it much. I think that most people wouldn't even recognize it as a problem because it fixes itself over time. If you notice, there isn't much discussion about installment loans here because it is very difficult to determine their actual impact on credit scores. About the only thing we know about them for sure is that it is good for your scores to always have an open installment loan. Your scores will drop when your last installment loan is paid off.

 

Now a bit about debt load...

 

FICO always works with percentages and not dollar amounts. Lenders work with dollar amounts to determine your DTI (Debt to Income) ratios. A $500 four year loan with $50 paid off and a $50,000 four year loan with $5000 paid off mean EXACTLY the same thing when it comes to FICO score calculations. FICO sees both as a four year loan that is 10% paid off. Got it?

 

Now a LENDER will pull your reports and use the dollar amounts and monthly payment amounts to see if you can afford the car payment that you just applied for.

 

FICO scores tell lenders what your chances of repaying your debts are based on past history but not if you can actually afford the loan or new credit.

 

And yes, in my opinion it is hurting your scores to have current balances that are higher than your starting balances. FICO does calculate BOTH individual accounts and all accounts collectively.

 

I use various credit monitoring websites for my personal use in tracking my scores and reports. For the longest time one of the reasons they were telling me my scores weren't higher was "Lack of installment loan history". I took out a four year $500 installment loan at a credit union. As soon as the installment loan reported to the credit reporting agencies my notification was "Installment loan balance is too high". (Sometimes you can't win for losing in these FICO reindeer games!) That notification did disappear after about 2 months.

 

So yes, they are checking the payoff ratio on installment loans. How many points does it mean to your score? Your guess is as good as mine.

 

My suggestion would be to get those over balance accounts paid down to 90% as soon as you can if it doesn't cause you too much trouble.

 

With the age of your credit history it seems that your 680 score is rather low. What does the rest of your credit look like?

 

What baddies are dropping off?

 

How many credit cards do you have? Who are the lenders? How old are they? What is their reported utilization? (balance/credit limit)

 

Where did you get that 680 score from?


Jamie123 was response much more elegant than I would have been.

 

I would disagree on one point, however.  We try to increase our credit scores to help reduce our financing costs.  Unless you are planning on buying a house soon, I would keep paying the higher interest rates first.  Depending on the difference in interest rates between your loans, it could save you a good bit of money.  Moreover, until the baddies fall off your CR, your credit score may not have that much room to increase.

 

Your utilization on your credit cards / revolving is much more important than your installment utilization.  High utilization on either individual installment loans or total installment loans probably is slightly hurting.  But the effect is probably not that great.

Message 4 of 6
jamie123
Valued Contributor

Re: Debt Limits and Your Credit Score


@Anonymous wrote:

Thanks for your response Jamie! Below are the answers to your questions and a clarification.

 

My credit history is over 10 years.

 

In my early 20's  (I am now almost 30), I suffered a long bout of unemployment and defaulted on two credit cards. One was for 1K the other for 1.5K. Both of these accounts have been settled, and will also come off due to age next year. I also had a repo that will come off in 2016. Very glaring blemishes, I know. Unfortunately, there wasn't much I could do about it at the time.

 

I have an AMEX Gold card, a Cap1 QS (4.5K), Barclay Reward (1.5K), Discover It (1.7K), and a card with my FCU (1.3K). All of these are a little over 2 years old now.


Yeah, those baddies are killing your scores. You do however have light at the end of the tunnel. If you keep up the good work I can see your scores rocketing to 760+ once the baddies fall off.


Starting Score: EQ 653 6/21/12
Current Score: EQ 817 3/10/20 - EX 820 3/13/20 - TU 825 3/03/20
Message 5 of 6
Anonymous
Not applicable

Re: Debt Limits and Your Credit Score

Thank you both for the responses. I appreciate your time. If you all have any source material, regarding my question, I'd love to see it. If not, no big deal, you've been more than helpful. If I happen to find anything else on the subject, I'll update this posting.

Message 6 of 6
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