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How much does loan balance to initial amount affect score

Established Member

How much does loan balance to initial amount affect score

To everybody that has greater knowledge of the working of credit scores than myself. I have a 5k loan from penfed that has a balance of $1600. If my junior high math still works, that would be 68% payed off. On all my CC tips to improve credit score, I get key factor affecting your score "Proportion of loan balances to loan amounts is too high FICO® Scores weigh the balances of mortgage and non-mortgage installment loans (such as auto or student loans) against the original loan amounts shown on a person's credit report. Your score was impacted because your proportion of installment loan balances to the original loan amounts is too high." All the scores I have access to, Fico 8,9 and vantage are all above 800, so I assume this has little effect on overall score? Just wondering what percentage of loan payed off would not be considered to high. Thanks
Message 1 of 8
7 REPLIES
Regular Contributor

Re: How much does loan balance to initial amount affect score

Get it below 8.9% and you'll be golden.

Message 2 of 8
Frequent Contributor

Re: How much does loan balance to initial amount affect score


chickenfoot123 wrote:
To everybody that has greater knowledge of the working of credit scores than myself. I have a 5k loan from penfed that has a balance of $1600. If my junior high math still works, that would be 68% payed off. On all my CC tips to improve credit score, I get key factor affecting your score "Proportion of loan balances to loan amounts is too high FICO® Scores weigh the balances of mortgage and non-mortgage installment loans (such as auto or student loans) against the original loan amounts shown on a person's credit report. Your score was impacted because your proportion of installment loan balances to the original loan amounts is too high." All the scores I have access to, Fico 8,9 and vantage are all above 800, so I assume this has little effect on overall score? Just wondering what percentage of loan payed off would not be considered to high. Thanks

Is this your only installment loan? Do you have open auto, mortgage or student loans? If so, what are your outstanding balances and original loan amounts? If this is your only open installment loan and your FICO scores are all above 800 then you're already golden and FICO had little to no advice for you which is why you may be seeing this negative factor on your reports. 

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Message 3 of 8
Community Leader
Senior Contributor

Re: How much does loan balance to initial amount affect score

There's two ways to look at this stuff.  One is theory -- that's when you are just curious how the FICO models work for the sake of curiosity.  The other is practical -- you need an answer because it is going to affect a loan you need, e.g. to buy a house or a car say.

 

The theory answer is that if you take the total amount owed (on all open loans) and divide it by the total original amount (on all open loans) you will get a percent; and you can be certain of getting the maximum scoring benefit for this factor at 8.9% or less (as long as you have one open loan).

 

Some people have gone from 819 to 850 by optimizing it.  You won't get that many points because your loan is already mostly paid off.  But you would get some points.

 

The practical answer is that your scores are so high that there's no need to try to make them higher.  If you can see that you will have all your loans paid off at some point in the near future, however, you should look up the Share Secure Loan Technique and implement it before all are paid off.

Message 4 of 8
Senior Contributor

Re: How much does loan balance to initial amount affect score

OP, I think there may be an element of time relevant to your question and the negative reason code you are seeing regarding balances being too high.  Everyone is correct that if you were to take your loan utilization down below 8.9% that you'd no longer see that negative reason code.  One other theory is that after a certain amount of time elapses of an installment loan being open, one doesn't need to get it below 8.9% in order to see that negative statement go away.  The most common example of this is a mortgage.  If you're 10 years in on a 30 year mortgage, you may be at 70-75% utilization on that mortgage still.  Due to the amount of time though, this loan can be considered "substantially paid down" even though the utilization percentage is still high.  When my mortgage was at around 75% utilization (25% paid off) I saw the negative reason codes go away and this was about 8 years into the mortgage.  I'm not sure if this is the case with other loan (non-mortgage) types, or if the term of the loan needs to be a certain length... like perhaps it would work on a 7 year auto loan but not a 3 year auto loan.  I'm not sure if we have enough data points on that.

Message 5 of 8
Community Leader
Senior Contributor

Re: How much does loan balance to initial amount affect score

BBS is absolutely right. 

 

Our OP has confirmed that he is under a FICO penalty even owing only 32% of the total balance.  (He's confirmed that by the negative reason statement on his FICO score.)  According to the reason statement, FICO won't be happy till he pays it down further.

 

As BBS observes it is possible that if he made the minimum required monthly payment for another 12 or 24 months (say) FICO might consider the extra history of payments as a mitigating factor, and give him the full scoring bonus even at 22% (say).  That's a conjecture that some people have made -- there's some strong reason to believe it is true for mortgages, though our OP's loan it sounds like is not a mortgage.

 

What is certain is that if our OP were to pay it down to 8.9% next week then that reason statement would go away. 

 

As a practical matter, however, I would advise our OP to make his decisions about his loans purely on financial grounds, and not on scoring grounds, given that his scores are so high now.  The only exception I would make is if he can see he will be paying off all of his loans soon -- or if he has a huge loan that he will be paying off.  Then he should circle back with the folks here to understand the scoring implications of that, just so he isn't surprised if his score takes a 20-30 point hit.  The hit associated with all loans being paid off can be circumvented with a nice trick invented by the folks here (notably Revelate).

Message 6 of 8
Established Member

Re: How much does loan balance to initial amount affect score

Thanks to all who replied. Very informative. This was a 5 year loan opened in January 2017. I had been making extra payments every month, so the expected payoff date is September 2018 if I continue with the scheduled payments only. Would paying off earlier be of any benefit, aside from the savings from the interest? It would not be a financial burden to do so. Thanks again for the responses!
Message 7 of 8
Community Leader
Senior Contributor

Re: How much does loan balance to initial amount affect score

Paying off your all of your loans (so that you have no open loans at all) hurts your FICO 8 score.  That's because the FICO 8 model really likes it when you (a) have at least one open loan and (b) have paid almost all of your open installment debt off.  Fortunately there is a workaround called the Share Secure Loan Technique.  People who are getting close to paying off all their loans often use it to prevent their score from dropping.

 

Posts 1 and 2 of that thread will tell you all you need to know about that technique.  By March/April we hope to have a few good alternatives to Alliant, which is the lender we had been recommending to people interested in the SSLT.

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