Installment Utilization

[stan_the_man]

I tried searching the forums and myFico for an answer to this, but I'm having trouble figuring out how big of a factor installment utilization is after I read this message on DW's Transunion Fico score report:

The remaining balance on your non-mortgage installment loans is too high.

Your FICO score weighs the balances of your non-mortgage installment loans (such as auto or student loans) against the original loan amounts. In general, when you first obtain an installment loan your balance is high, and as you pay this loan down, the balance decreases.

Keep in mind: This factor will have less of a negative impact on your FICO score as you pay down your installment loans and the total balance decreases.

********************
Check your installment loans to calculate your remaning balances
FICO High Achievers have paid down an average of 35% of the principal on their installment loans.
********************

I know that "Amounts Owed," or utilization, is 30% of the Fico score, and that "Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)":

http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

What I don't know is about how much of the 30% is ties to installment loans. If anyone knows/can provide some guidance, that would be wonderful.

Also, I have some interesting scenarios that I'd like to throw out there if someone who understands installment utilization scoring would like to help us all understand how installment utilization scoring.

[RobertEG]

It is kinda all about experience, for FICO does not reveal the true emphasis on revolving vs installment util on total scoring of credit utiil.

Here is my opinion.

First, what FICO is all about.  FICO is about assessing risk on repayment of debt.  FICO, and anyone with half a brain, would know that, at any point in time, any consumer is more apt to first pay his instatllment loans, such as a mortgage or auto loan, for failure to pay them timelly involves the potential loss of real property.

Second, anyone taking out an intial installment loan is, intitially, by definaiton, at 100% util.  But they have a lot investted in timely payment.

Revolving credit util is a totally different animal.  It is the consumer's ability, within prescribed credit limits, to incur debt with, usually, litttle or no securement

Both a much bigger risk, and also a lessor priority of consumer payment should times get rough.

OK.  My overview.  FICO scoring assigns 30% of your score to current util of credit.  My experience is that 80-90% of evaluation of % util is based on util of revolving, and not installment util.  FICO expects, and understands, high % util on installment credit. 
FICOt becomes wary when discretionary, revolving balances, wih a lower liklhood of first payment, become high.

I can pretty safefully speculate that, when it comes to scoring of your 30% of total FICO score under util of credtit. that around 85% more is based on util of revolving credit, and only 15% max based on installment util.

My observation, and opinion.

[stan_the_man]

I totally understand what you're saying, and I agree that installment utilization is certainly a small part of utilization's impact on scores overall.

My problem is that I'm working at the margins, and this is one of the few areas I can actually do something -- other than wait -- to help improve DW's Fico score.

Let me throw out a fun hypothetical.

Let's say you take out two $10,000 student loans -- one at 4% and the other at 5% -- and after one year you have a balance on each of $9,000 (or 90% utilization, both individually and overall).

Now let's say you have $8,000 to pay down those loans.

Economically, it makes sense to pay down the higher interest rate one first. Leaving the 4% loan at $9,000, and the 5% loan at $1,000. You would then have an overall utilization of 50%, but loan utilizations of 90% and 10%.

But, what if there was a big boost in score for hitting 75% utilization? Then you would pay down the 4% loan $1,500 and the 5% loan $6,500, leaving you with the 4% loan at $7,500 and the 5% loan at $2,500. You would then have an overall utilization of 50%, but loan utilizations of 75% and 25%.

Alternatively, if there was a score boost for hitting 50% utilization you would pay down the 4% loan $4,000 and the 5% loan $4,000, leaving you with the 4% loan at $5,000 and the 5% loan at $5,000. You would then have an overall utilization of 50%, but loan utilizations of 50% and 50%.

In each case, the overall utilization is the same, but the trade line utilizations differ greatly.

Unfortunately, I have no clue how to best pay down these loans (and complicating DW's situation is that the interest rate spread is a lot smaller than this example -- 0.25%). Conversely, our paying down the loans may have no impact on DW's Fico scores and I may be better off saving the cash for our future down payment (since, in the long run, PMI -- if we need to pay it -- may end up costing us more money than the increased interest charges from not paying down the principle of the student loans, and any interest rate reduction we might receive a result of the small -- if any -- increase in Fico scores she might receive from paying down the loans).

[llecs]

If revolving utilization is compared to a large boulder, then installment utilization is compared to a pea. I bet if you brought your overall util from 100% to 1%, as an example, you probably wouldn't notice a score change, or if you did, a single digit or so. YMMV based on your bucket I bet. The only example I can give is that I paid my only loan from 20% to 1-3% (last payment) and my FICOs didn't change.

[TLinFargo]

[quote=RobertEG]Second, anyone taking out an intial installment loan is, intitially, by definaiton, at 100% util.[/quote]Very interesting... So, instead of making a big downpayment, one could wait till the loan is in place, then put the money towards the principal to get the util down...

[stan_the_man]

If, there is any benefit at all. Also, you may end up paying higher interest rates because your down payment was small. So, you'd have to balance the two.

No one ever said that blind Fico calculus wasn't fun....

[TLinFargo]

I have a note on my TU score report that says "The amout paid on your open real estate accounts is too low." - though maybe that's specific tho the Vantage score algorithm... I paid 20% down, to get away from PMI, maybe if I had been in a position to do 30% it'd be best to split it 20% down, 10% on principal. Granted, that extra 10% would be figured into the monthly payment, but that shouldn't be too bad...

[GregB]

Several years ago I purchased a new motorcycle for $20,000. I financed it 100% so that I could get it when it was available and then sell the items that were paying for much of it. The new loan did its expected damage of around 20 points. By the third payment, I paid the principal down by $5,000. After another month or two, I paid the principal down by another $5,000. Neither of these two large transactions made much improvement in my FICO. I wasn't keeping track carefully at the time but I think it is safe to say that I did not see 5 points out of either.

[TLinFargo]

Interesting! Thanks for chiming in Greg.

[haulingthescoreup]

My myFICO reports no longer display all four negatives (the higher your scores, the fewer negatives they display, to keep the poor customer service reps from dealing with outraged High Achievers ), so I occasionally pull a /12 report to see all four.

Although I saw the "balance on non-mortgage accounts" negative right after getting a new car, it no longer displays. In fact, it was only there for a month before it was replaced by something else. (Negatives don't go away until you're way up there in scores. They just get bumped off the top-4 list.)

My mortgage is at about 67% util and my car loan is at about 40%. The four negatives that do display are really dredging the bottom toward the end, including too many consumer finance loans. I have one.

So she might squeeze out a few points by reducing util, but I doubt there'd be much more.

What might be more helpful is to work on paying off all but one installment loan, thus reducing the number of tradelines with balances. Even if the balance on that remaining account was the same amount as it would have been if it were spread across multiple accounts, she might benefit from only having one open account.

I wouldn't be in a hurry to pay that last one off, though. We've had reports of scores dropping when the last open installment account was paid off. Although normally the advice would be to pay them off anyway to save interest (good financial sense), in her case it would be better to aim for good scoring sense, since this will ultimately affect your new mortgage rate.