How much of my auto loan should I pay down?

[HiLine]

As some of you know, I am going for an 800 FICO in 2 months, and I'm trying to cover all bases. I already know what to do with my credit card balances, but I'm completely clueless about installment loan balances. My original balance was 24k, and I've paid it down to 20k. I could pay more if that would help me achieve the 800 FICO goal, but if that would not help, I would rather take it easy on the auto loan since the interest rate on it is very good. 

In your experience, what ratio of installment loan balance to original balance is good for FICO scores? I'm assuming the lower the better, but at what point do we start to encounter diminishing marginal returns? 

[MarineVietVet]

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@HiLine wrote:

As some of you know, I am going for an 800 FICO in 2 months, and I'm trying to cover all bases. I already know what to do with my credit card balances, but I'm completely clueless about installment loan balances. My original balance was 24k, and I've paid it down to 20k. I could pay more if that would help me achieve the 800 FICO goal, but if that would not help, I would rather take it easy on the auto loan since the interest rate on it is very good. 

In your experience, what ratio of installment loan balance to original balance is good for FICO scores? I'm assuming the lower the better, but at what point do we start to encounter diminishing marginal returns? 

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Hi there.

I will give the same opinion I always offer. Pay off any and all debt as fast as possible. Your score will take care of itself but not having debt is more important at least IMO.

It's true that scoring looks at the current balance of installment loans versus original balance but I really don't believe it's worth much concern.

But that's just me. Everyone needs to decide what tactic will work best for them.

[HiLine]

Happy Veterans' Day to you!

I do believe that this ratio is of great concern since one my weaknesses in FICO scoring is the ratio being too high, apparently. I don't like paying too much either since doing so would severely restrict the cash flow that I need for other life activities.

[MarineVietVet]

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@HiLine wrote:

Happy Veterans' Day to you!

I do believe that this ratio is of great concern since one my weaknesses in FICO scoring is the ratio being too high, apparently. I don't like paying too much either since doing so would severely restrict the cash flow that I need for other life activities.

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I very much respect your view on this. Only you can make the final decision.

For years I would always get dinged by TU for "ratios of  beginning balances compared to current balances too high". Or some such nonsense. I always ignored it.

The number of points you are possibly losing is miniscule.

Thanks for the shout out about Veterans Day!

[jamie123]

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@HiLine wrote:

Happy Veterans' Day to you!

I do believe that this ratio is of great concern since one my weaknesses in FICO scoring is the ratio being too high, apparently. I don't like paying too much either since doing so would severely restrict the cash flow that I need for other life activities.

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This is a glaring weak spot on this forum: How much is an installment loan worth in points? How is it scored?

The answer to those questions have so far been elusive on these forums.

We do know that once you pay off your auto loan, and it is your only installment loan, your score could drop anywhere from 10 to 50 points. The 10 to 50 points you lose are not all the points represented by the installment loan. Just by having the closed installment loan on your reports represents some points that probably drop off slowly.

It is also thought that points earned with an installment loan happen very slowly month to month which makes it difficult to impossible to discern from the normal noise in a report. I mean if your score went up 2 points this month could you say for certain that it was caused by your auto loan or just your accounts aging a bit? You will however notice that when you close the account and your score drops 20 points exactly where those points came from.

I have yet to see anyone on this forum gain a significant amount of points by lowering their ratio of money owed on an installment loan.

You also must know your specific loan terms. Some loans let you pre-pay the balance while keeping the loan length the same. Other loans will shorten the loan payback period if you pre-pay the balance and the loan will close early.

[MarineVietVet]

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@jamie123 wrote:

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@HiLine wrote:

Happy Veterans' Day to you!

I do believe that this ratio is of great concern since one my weaknesses in FICO scoring is the ratio being too high, apparently. I don't like paying too much either since doing so would severely restrict the cash flow that I need for other life activities.

---

This is a glaring weak spot on this forum: How much is an installment loan worth in points? How is it scored?

The answer to those questions have so far been elusive on these forums.

We do know that once you pay off your auto loan, and it is your only installment loan, your score could drop anywhere from 10 to 50 points. The 10 to 50 points you lose are not all the points represented by the installment loan. Just by having the closed installment loan on your reports represents some points that probably drop off slowly.

It is also thought that points earned with an installment loan happen very slowly month to month which makes it difficult to impossible to discern from the normal noise in a report. I mean if your score went up 2 points this month could you say for certain that it was caused by your auto loan or just your accounts aging a bit? You will however notice that when you close the account and your score drops 20 points exactly where those points came from.

I have yet to see anyone on this forum gain a significant amount of points by lowering their ratio of money owed on an installment loan.

You also must know your specific loan terms. Some loans let you pre-pay the balance while keeping the loan length the same. Other loans will shorten the loan payback period if you pre-pay the balance and the loan will close early.

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You make some very good points and each person needs to decide what they think works best for their situation.

For me a score is always secondary to paying off debt yet I admit if my credit picture was more precarious I might choose a different path. For the 40+ years I've used credit though I've thought the same thing about debt.

Different choices by other people are just as valid as any opinion I might.

[HiLine]

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@jamie123 wrote:

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@HiLine wrote:

Happy Veterans' Day to you!

I do believe that this ratio is of great concern since one my weaknesses in FICO scoring is the ratio being too high, apparently. I don't like paying too much either since doing so would severely restrict the cash flow that I need for other life activities.

---

This is a glaring weak spot on this forum: How much is an installment loan worth in points? How is it scored?

The answer to those questions have so far been elusive on these forums.

We do know that once you pay off your auto loan, and it is your only installment loan, your score could drop anywhere from 10 to 50 points. The 10 to 50 points you lose are not all the points represented by the installment loan. Just by having the closed installment loan on your reports represents some points that probably drop off slowly.

It is also thought that points earned with an installment loan happen very slowly month to month which makes it difficult to impossible to discern from the normal noise in a report. I mean if your score went up 2 points this month could you say for certain that it was caused by your auto loan or just your accounts aging a bit? You will however notice that when you close the account and your score drops 20 points exactly where those points came from.

I have yet to see anyone on this forum gain a significant amount of points by lowering their ratio of money owed on an installment loan.

You also must know your specific loan terms. Some loans let you pre-pay the balance while keeping the loan length the same. Other loans will shorten the loan payback period if you pre-pay the balance and the loan will close early.

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You brought up some good points. I do think though that the positive impact of an auto loan could be felt sooner; if your credit profile does not reach a new AAoA or length milestone, it is pretty unlikely that aging had an impact on your score. Other factors such as changing utilization could add to the noise, but the same applies to credit cards as well.

I guess the reason we haven't seen people gain many points by paying down installment loans is because it takes a lot of money to significantly lower auto loan or mortgage balances. Other types of installment loans are just not as common.

I have not paid attention to the impact on the length of the loan of accelerated payments. Since the average ratio for high scorers according to MyFICO is 63%, I am going to drop at most 3k extra for this 800 FICO quest which is not going to shorten the duration of the loan too much if at all.

[jamie123]

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You brought up some good points. I do think though that the positive impact of an auto loan could be felt sooner; if your credit profile does not reach a new AAoA or length milestone, it is pretty unlikely that aging had an impact on your score. Other factors such as changing utilization could add to the noise, but the same applies to credit cards as well.

I guess the reason we haven't seen people gain many points by paying down installment loans is because it takes a lot of money to significantly lower auto loan or mortgage balances. Other types of installment loans are just not as common.

I have not paid attention to the impact on the length of the loan of accelerated payments. Since the average ratio for high scorers according to MyFICO is 63%, I am going to drop at most 3k extra for this 800 FICO quest which is not going to shorten the duration of the loan too much if at all.

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There is another really long thread in these forums concerning installment loans.

Many people including myself, have tried tracking the results of installment loans without any real results. There aren't any triggers that gain you a significant amount of points. It's not when 25%, 50% or 90% of the loan is paid off. It's not when it is 6 months, 1 year or 3 years old. The gain is sloooooow! It is only when you close the loan that you see a significant point drop. If it was that easy we would have figured it out because several people have tried doing just what you are contemplating doing and only gained maybe 5 points if that. One person even tried paying his auto loan down early to a $10 remaining balance. The bank thought he made an error in writing his check, gave him credit for the $10 and closed his account!

It is probably as simple as you getting 1 point every month that you have an open installment loan reporting on time payments up to a certain point cap. You won't notice your score going up 1 point a month for 6 months or for 48 months but you will notice the drop once it is closed. Maybe for the first year you only get 1 point every other month and then 1 point a month. Who knows? We just know it is a very slow point gain over time without any triggers that add a significant amount of points at one time.

We have found that in opening an installment loan you might lose from 0 to 20 points. Most people seem in the 5 to 10 point loss range. These lost points from opening the loan seem to be restored to your score rather quickly, say in about 3 to 6 months.

People that are able to get perfect 850 scores in the FICO 04 model have these characteristics in common on their reports:

1. 5 to 8 credit cards with an AAoA of 10 years with the newest card being at least 2 years old.

2. A 30 year mortgage that they have been paying on time for at least 10 years and more likely 20 years.

3. An old closed auto loan that was paid on time.

4. An open auto loan that has been paid on time for at least 2 years.

5. A HELOC that is currently unused.

Now I know you are shooting for only 800 on the 08 model which is a bit easier. If you look at what you have on your reports and what people that have on an 850 FICO 04 report the only real difference that I see is age.

I opened an installment loan because I didn't have any installment loan history on my reports and was tired of seeing "No installment loan history" as a negative factor on my reports. The very day the loan reported the "No installment loan history" changed to "Too high remaining balance from starting balance.*

[Anonymous]

Based upon my own observances when it comes to installment loans over the years, and I have MANY of them from cars and vacation property, I would suggest getting your car loan below 80% and see how that effects you.

If there are any milestones what so ever for the installment loan models, below 80% and 50% seem to be the "big" ones.

"Big" being subjective. I think others are correct however in that any increase of your scores will be minimal. I predict 3-5 points at best.

[HiLine]

I think my score went up by 2 points when I paid down to below 80%. But the increase could have been due to other factors. So, yes, like you guys have said, the impact is minimal. No more overpayment from now on ...