EX dropped 13 points - one installment paid off but another still open?

[Thomas_Thumb]

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@Anonymous wrote:

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@Anonymous wrote:

Thanks!  Then yes, the factor that hurt you is one from the "Amounts Owed" category of FICO scoring.  That is one of the biggest heavily weighted categories.  The factor at issue here is "total installment utilization."  It's very much like credit card utilization, only it applies to installment loans.

You saw a very straightforward example of what happened in SouthJamaica's response to your post.  That's basically how it works.  Here's a little bit more of a detailed description.

You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amounts you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

When you had two open loans, your total installment U was :69.8%:

      ( $100 + $27,000) / ($10,000 + $28,800)

After you closed the first loan, you only had one open loan.  So your installment utilization was 93.7%:

      27000 / 28800

As you pay the remaining loan down, your total installment U will go down and your score will go up.  If you can get your TIU under 69% then you should get back the points you lost.  You'll get even more points still when you get your TIU down to the range of 1-9%.

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Thank you very much for the quick responses.  I have a terrific interest rate but I may just go ahead and make a large payment to get it below 69% as this is my only installment loan.

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Consider making a paydown to 89% as a 1st step and see if score reacts before making a decision to paydown to 69%.

Also, if you have a terrific interest rate why not just pay off the loan naturally after the 1st step paydown regardless of outcome? After all, one of the primary reasons to obtain a good credit score is to be able to secure loans at favorable interest rates. Interest rates are more likely to go up than down in the future - IMO.

[Anonymous]

Great advice from TT.  I agree.

It's possible that you may have a semi-important need for credit in the next six months, which would explain why you want the points you lost back sooner rather than later. 

But if you don't see any particular need for credit looming in the next year or so, then there isn't any rush on getting the points back, especially since the loan has a sweet interest rate.

Here's a possible solution that might get you the best of both worlds: talk to the lender managing your current loan.  Ask them if it is possible to make a big payment now to lower the total amount owed, but still keep the loan open for the normal loan term.  I did that with a car loan.  Some lenders are very willing to let you do that.  It may be because they push the next "due date" out by many months, or it may be that they recalculate the monthly payment.

This way you will end up paying very little interest (big chunk of principal is paid off), you'll get a FICO scoring benefit from the immediate much lower utilization, and you'll still keep the account open for a long while.

[Anonymous]

Just got notified that TU went from 780 to 762, grrrrrrr.