cancel
Showing results for 
Search instead for 
Did you mean: 

Does reducing auto loan payment by 20% improve credit score

tag
Anonymous
Not applicable

Does reducing auto loan payment by 20% improve credit score

Hi all,

 

       Here is my situation: My credit card utilization is always <6%, 1 month ago i had a auto loan for 17,000$ . My credit score at that point were Fico8 (equifax- 716, experian-720, transunion - 710).  I refinanced my auto loan(as apr was coming down from 4 to 1.7%) with my current loan balance 27,000(i took 10,000$ out ) . As a result of auto loan refinance my scores plunged by -17 points , currently my fico8 scores are 694 equifax, 689 experian. 

 

      If i reduce my loan balance to 22,000$ (by paying back 5,000$) what are the chances that my score reaches 700 points ? Any ideas to improve my score before feb 2016(i am closing on my house in feb) . 

 

      

Message 1 of 26
25 REPLIES 25
Anonymous
Not applicable

Re: Does reducing auto loan payment by 20% improve credit score

I think the odds are good that if you pay the loan down by $5K your scores will rebound to 700 once the new balance reports.

Message 2 of 26
Thomas_Thumb
Senior Contributor

Re: Does reducing auto loan payment by 20% improve credit score


@Anonymous wrote:

Hi all,

 

       Here is my situation: My credit card utilization is always <6%, 1 month ago i had a auto loan for 17,000$ . My credit score at that point were Fico8 (equifax- 716, experian-720, transunion - 710).  I refinanced my auto loan(as apr was coming down from 4 to 1.7%) with my current loan balance 27,000(i took 10,000$ out ) . As a result of auto loan refinance my scores plunged by -17 points , currently my fico8 scores are 694 equifax, 689 experian. 

 

      If i reduce my loan balance to 22,000$ (by paying back 5,000$) what are the chances that my score reaches 700 points ? Any ideas to improve my score before feb 2016(i am closing on my house in feb) . 

 

      


No pain, no gain.

 

If you really want to boost score, I would suggest reducing outstanding balance to just under 60% of total loan amount - to say $16,000 if refinanced loan was $27,000. Would a 720 score by January reduce your interest rate?

 

No pain, no gain

Fico 9: .......EQ 850 TU 850 EX 850
Fico 8: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
Fico 8 BC:. EQ 892 TU 900 EX 900
Fico 8 AU:. EQ 887 TU 897 EX 899
Fico 4 BC:. EQ 826 TU 858, EX Fico 98 BC: 870
Fico 4 AU:. EQ 831 TU 872, EX Fico 98 AU: 861
VS 3.0:...... EQ 835 TU 835 EX 835
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 3 of 26
Anonymous
Not applicable

Re: Does reducing auto loan payment by 20% improve credit score

Hello rajkandukuri.  You mention that you always keep your credit cards at < 6%.   Can you tell us how many open credit cards you have, amd of those how many typically show a positive balance?  You may get a signifucant point increase by paying all your cards down to zero except one and have that remaining card report a fairly small balance, like $20. 

 

As far as paying down the new auto loan, I agree with TT that this would be a great thing to try.  Before you do it, make sure you speak with the lender and confirm that you can indeed do that,  Some loan agreements limit how much you can do to later pay down the principal.

Message 4 of 26
Anonymous
Not applicable

Re: Does reducing auto loan payment by 20% improve credit score

Hello CreditGuyinDixie

               I have 5 credit cards with total limit of 58000$ and i use only 1 card(american express) and i keep it less than 28% of the limit. As soon as i reach 30% i pay down my credit card in full or in half. 

 

              I did check with my bank and they confirmed that i can make payment against the prinicpal for my auto loan but it wont reduce my monthly payment however it will reduce my term of the loan.

 

               What If i take balance transfer from credit cards to reach a goal of 12,000$ from multiple credit cards in such a way that i wont cross 30% of the credit limit on them and use it pay my auto loan - that brings down auto loan balance to 60% of the original loan amount and keeps my credit card balances to less than 30% on multiple accounts - will that help ??

 

 

 

 

Message 5 of 26
Anonymous
Not applicable

Re: Does reducing auto loan payment by 20% improve credit score

Hello Thomas_Thumb

 

                   Yes, 720 by January will be great and will help reduce my interest % for my home purchase. I have 5 credit cards with total limit of 58000$ and i use only 1 card(american express) and i keep it less than 28% of the limit. As soon as i reach 30% i pay down my credit card in full or in half. 

 

              I did check with my bank and they confirmed that i can make payment against the prinicpal for my auto loan but it wont reduce my monthly payment however it will reduce my term of the loan.

 

               What If i take balance transfer from credit cards to reach a goal of 12,000$ from multiple credit cards in such a way that i wont cross 30% of the credit limit on them and use it pay my auto loan - that brings down auto loan balance to 60% of the original loan amount (as suggested) and keeps my credit card balances to less than 30% on multiple accounts - will that help ??

Message 6 of 26
Thomas_Thumb
Senior Contributor

Re: Does reducing auto loan payment by 20% improve credit score


@Anonymous wrote:

Hello Thomas_Thumb

 

                   Yes, 720 by January will be great and will help reduce my interest % for my home purchase. I have 5 credit cards with total limit of 58000$ and i use only 1 card(american express) and i keep it less than 28% of the limit. As soon as i reach 30% i pay down my credit card in full or in half. 

 

              I did check with my bank and they confirmed that i can make payment against the prinicpal for my auto loan but it wont reduce my monthly payment however it will reduce my term of the loan.

 

               What If i take balance transfer from credit cards to reach a goal of 12,000$ from multiple credit cards in such a way that i wont cross 30% of the credit limit on them and use it pay my auto loan - that brings down auto loan balance to 60% of the original loan amount (as suggested) and keeps my credit card balances to less than 30% on multiple accounts - will that help ??


A few concerns with this approach. The primary one is that you are not paying down overall debt but transferring it from a "low interest" auto loan to "high interest" credit card debt.

 

I don't believe this type of debt transfer will deliver the score boost you desire. However, it will increase your interest payments (not good)

1) The # cards reporting a balance is a factor in scoring - if you go from reporting a balance on one card to 3 or 4 cards => score drop. If you report a balance on 100% of cards => bigger score drop.

2) Aggregate UT% can significantly impact score. If you have a $5k balance now and add another $12k across multiple cards, your UT% increases from just under 9% to 29%. Anticipate a score drop associated with this.

 

Best to pay down the auto loan as much as possible without increasing credit card debt. Continue practice of reporting a balance on one card only while maintaining aggregate UT at 9% or less.

Fico 9: .......EQ 850 TU 850 EX 850
Fico 8: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
Fico 8 BC:. EQ 892 TU 900 EX 900
Fico 8 AU:. EQ 887 TU 897 EX 899
Fico 4 BC:. EQ 826 TU 858, EX Fico 98 BC: 870
Fico 4 AU:. EQ 831 TU 872, EX Fico 98 AU: 861
VS 3.0:...... EQ 835 TU 835 EX 835
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 7 of 26
Anonymous
Not applicable

Re: Does reducing auto loan payment by 20% improve credit score

I agree with ThomThumb 100%.  Everything he said is correct.   It is very much in your interest to do the following:

 

(1)  Keep all credit cards at a zero balance except one.

 

(2)  The remaining credit card should have a positive reporting balance that is low enough that it keeps your total utilization in the area of 1-9%.  (Note: FICO rounds utilization up to the next whole number, so this technically means keeping your total utitlization < 8.9%.)

 

(3)  All remaining cash not needed for the mortgage and for keeping your CC utilization low should be assembled ASAP and placed toward lowering the principal on your auto loan.

 

(4)  After you get your auto loan lowered and your CC debt under 9%, confirm that the new balances are appearing on all three of your credit reports.  Then and only then it might be a great idea to subscribe to a service like myFICO where you can obtain the true FICO scores that will be used in your mortgage decision.  These scores are NOT the FICO 8 scores you see most often discussed here on the MF forums.  They are from older FICO models.  At that time you should be able to see what you have acheved in terms of score progress.

 

FINAL NOTE:

If you really want to look for every possible point gain, comb throuugh your reports and do the following:

    *  Compute your Average Age of Accounts (AAoA).  Look to see if that might be transitioning to a new integer number.  (E.g. 2.9 to 3.0, 3.9 to 4.0)

    *  Look to see if a credit card might be turning 1 year old.

    *  Look to see if any inquiries might be turning 1 year old.

 

If it looks like any of these three things might be happening before your home loan goes through final underwriting, these could also give you a score boost.

 

Above all do not open any new accounts or do anything to cause yourself more inquiries between now and when you close.

 

 

 

Message 8 of 26
Revelate
Moderator Emeritus

Re: Does reducing auto loan payment by 20% improve credit score

80% is the likely breakpoint but 60% is known to work.

 

To add something though: when we're talking mortgage trifecta, this only affects EX 98.  You won't have seen the drop on FICO 04... so before you do something drastic like kick 5K to the car note (and FWIW I'd never take a cash advance on a credit card to pay off a car loan, doesn't make financial sense), pretty up your revolving balances and then pull your full scores here for $60 and see what your mortgage ones explicity are as you're better off hoarding that cash for downpayment and closing.

 

Before I started installment balance twiddling my mortgage trifecta was non-trivially higher than my FICO 8, and yours might well be too; you absolutely want to know where you stand before you start spending non-trivial cash to optimize.




        
Message 9 of 26
Anonymous
Not applicable

Re: Does reducing auto loan payment by 20% improve credit score

Great advice, R.  Thanks.

Message 10 of 26
Advertiser Disclosure: The offers that appear on this site are from third party advertisers from whom FICO receives compensation.