Installment Loans and my FICO score

[Anonymous]

I'm confused about installment loans. I understand that revolving credit should stay below 30% utilization, but how does this apply for installment loans? My credit score is 643 and I'm hoping to bump it up to 750 and apply for a home loan in the next year or two.

Here's where I currently stand:

5 open credit card accounts, totaling $10,000 in available credit. Currently have a $2,300 balance. (average 1 year old)

Student Loan balance of $27k-ish. (12 years old)

Auto Loan balance of $30k-ish. (7 months old)

Average age of accounts 3.3 years.

I have a chapter 13 bankruptcy filing on my report, but I didn't follow through (it was dismissed) and it's supposed to fall off November, 2019. (I'm not sure how this is currently affecting my FICO score, so wanted to mention it)

Payments on all accounts are 100% on-time.

I had planned to pay off my auto loan balance to pay less interest over time, and then save for a home loan, but after reading through these forums it seems this may counter my attempt to raise my FICO score, and instead actually lower it.

So here is what I'm thinking:

Pay off credit card balance (of $2,300) and then charge around $700/month, to be paid in full each month so I won't carry a running balance.

Pay auto loan down to approximately $10,000. This should take me around one year. It's a simple loan so it will save significantly on interest, but will keep the account open for scoring purposes.

I'm hoping these two things will bump my FICO up enough to apply for a home loan in spring, 2019.

Once I have the home loan, I will pay off the remaining balance on the car and student loans.

I would appreciate any thoughts on what else I can do to raise my FICO, particularly regarding the installment loans.

[Anonymous]

Honestly installment loans are probably the last thing you need to worry about with respect to your profile currently. Where your installment loan utilization sits has very little bearing on your overall score. Installment loan utilization going from a worst-case scenario to a best case scenario usually only comprises about 25 points. You're leaving more points than that on the table with your revolving utilization currently, so definitely get that paid down to a single digit aggregate utilization number as soon as possible. The other thing is your profile is definitely being impacted by that bankruptcy. If that wasn't there your score would already be in the low to mid 700

[Anonymous]

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wrote:
Honestly installment loans are probably the last thing you need to worry about with respect to your profile currently. Where your installment loan utilization sits has very little bearing on your overall score. Installment loan utilization going from a worst-case scenario to a best case scenario usually only comprises about 25 points. You're leaving more points than that on the table with your revolving utilization currently, so definitely get that paid down to a single digit aggregate utilization number as soon as possible. The other thing is your profile is definitely being impacted by that bankruptcy. If that wasn't there your score would already be in the low to mid 700

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Thank you! I will have the revolving paid to zero by this time next month. I don't particularly want to wait until the bankruptcy falls off my report to apply for the home loan, but if it will make that big of a difference and it means waiting just a few more months, I will! In your opinion, does it make more sense then for me to focus on getting the installment loans paid down, or to sock that money away for a bigger down payment?

[SouthJamaica]

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wrote:

I'm confused about installment loans. I understand that revolving credit should stay below 30% utilization, but how does this apply for installment loans? My credit score is 643 and I'm hoping to bump it up to 750 and apply for a home loan in the next year or two.

Here's where I currently stand:

5 open credit card accounts, totaling $10,000 in available credit. Currently have a $2,300 balance. (average 1 year old)

Student Loan balance of $27k-ish. (12 years old)

Auto Loan balance of $30k-ish. (7 months old)

Average age of accounts 3.3 years.

I have a chapter 13 bankruptcy filing on my report, but I didn't follow through (it was dismissed) and it's supposed to fall off November, 2019. (I'm not sure how this is currently affecting my FICO score, so wanted to mention it)

Payments on all accounts are 100% on-time.

I had planned to pay off my auto loan balance to pay less interest over time, and then save for a home loan, but after reading through these forums it seems this may counter my attempt to raise my FICO score, and instead actually lower it.

So here is what I'm thinking:

Pay off credit card balance (of $2,300) and then charge around $700/month, to be paid in full each month so I won't carry a running balance.

Pay auto loan down to approximately $10,000. This should take me around one year. It's a simple loan so it will save significantly on interest, but will keep the account open for scoring purposes.

I'm hoping these two things will bump my FICO up enough to apply for a home loan in spring, 2019.

Once I have the home loan, I will pay off the remaining balance on the car and student loans.

I would appreciate any thoughts on what else I can do to raise my FICO, particularly regarding the installment loans.

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Oddly enough, for installment loans, it is harder to pin down for the mortgage scores than for FICO 8. For FICO 8 it is clear that when your overall installment loan utilization percentage is 9% or lower, but above zero, you are in the sweet spot for scoring. But it is less clear as to how much this helps the mortgage scores. In my experience, TU was responsive to it, and EX was not. I never found out how EQ reacted. Others have reported different findings.

For credit cards it's easy. Each month let 1 card report a small balance, with the other cards reporting zero balance, and all your scores will be optimized in that department.

[Anonymous]

The great news is that you are planning far in advance for your home purchase.  Good for you.  That gives you plenty of time to find the best course of action.  Here's the plan I would recommend.

Pay all cards to zero except one (AZEO) as the other folks have recommended, with your total utilization at < 4%. 

Then use some free reporting tools to make sure that your new CC balances are reporting and the BK is your only derog.

Then buy your true mortgage scores here at myFICO.  (If you have inquiries that are 10-11 months old, you may want to wait a couple months until they are over 367 days old.)

If the mortgage scores are in the mid-700s (improbable) then you can go ahead with your purchase without waiting the additional few months for the BK to fall off.  Otherwise wait for it to fall off and then buy.

Regardless you should not be throwing any extra money at your loans right now.  Save it for a DP.  The scores are easy to fix, via time and correcting CC balances.

PS.  And of course, do not apply for any new accounts between now and when you actually own your house.

[Kree]

Because you have student loans, no need to keep the autoloan open.  While a higher downpayment might be preferable. Depending on your finances, paying off the Autoloan before applying might be more beneficial.  This would lower your debt to income by removing a large monthly payment.

This really depends upon your scores, your income, and what mortgage amount you are looking for.

[SouthJamaica]

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wrote:

Because you have student loans, no need to keep the autoloan open.  While a higher downpayment might be preferable. Depending on your finances, paying off the Autoloan before applying might be more beneficial.  This would lower your debt to income by removing a large monthly payment.

This really depends upon your scores, your income, and what mortgage amount you are looking for.

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I respectfully disagree with that. Closing any loan will reduce the size of the denominator, thus increasing the percentage.

[Anonymous]

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wrote:

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wrote:

Because you have student loans, no need to keep the autoloan open.  While a higher downpayment might be preferable. Depending on your finances, paying off the Autoloan before applying might be more beneficial.  This would lower your debt to income by removing a large monthly payment.

This really depends upon your scores, your income, and what mortgage amount you are looking for.

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I respectfully disagree with that. Closing any loan will reduce the size of the denominator, thus increasing the percentage.

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Hi SouthJ.  I think Kree is talking about the DTI ratio, which has nothing to do with a person's FICO score, but which is something that the mortgage lender will look at.

My advice is not to pay off either loan in the next nine months.  Just keep making the regular payments on each and save your money in a cash account.  You can decide whether you need to lower your DTI closer to the home purchase.

But as SouthJ observes, the OP should be aware that any total payoff of a loan will alter his total installment utilization, and that in turn could hurt his mortgage scores. 

[Anonymous]

Thank you for your responses. This has been very helpful. 

Regarding DTI ratio, my current gross monthly income is $11,175 and my current debt payments (auto loan and student loan) total $801. This does not include revolving credit which will be paid to zero within the next couple of weeks. I'm hoping for a mortgage around $350k. 

[Kree]

Paying it off will do little for you then.  As your 350k would be well under 36%dti with the car included.