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Frequent Contributor
Kozmo
Posts: 318
Registered: ‎07-08-2012

Loan consolidation effect on Fico

Hello friends,

Just out of curiosity, how does taking out a loan for credit card consolidation effect your FICO? Other than the inquiry+AAOA taking a slight hit, would it make more sense to do the consolidation since I have a high UTIL on my accounts?


I would pay them down normally but I am getting married soon and so any extra money is reserved for just that.

I have 3 accounts and all of them are easily over 70% util which I know is killing my score (660-ish).

So if I get a loan, pay off the cards they still stay open right? And so my util on those should drop. I've read on here that a high util on a loan is scored much differently than a credit card debt. Is this true?

We are applying for a FHA loan soon. Chances are the wifey can be approved on her own but just in case they do pull my credit id like it cleaned up as a high util on cc's usually scares people off.


Will this likely improve my score or no? Would it likely take a hit because of the Aaoa+inquiry or go up because the balances on the 3 accts are going down to $0?.

My limits are not high on these $1,000, $1,500 and $2,600. What are the chances if I pay these off and use them once right away for a small purchase that they would cut my limit on them?

Thanks!
Frequent Contributor
mtrsprt
Posts: 307
Registered: ‎07-27-2011

Re: Loan consolidation effect on Fico

Never borrow money to pay off debt.........


Starting Score: 521 TU, 597 EQ, 574 EX on 6/20/2011
Current Score: 718 TU, 698 EQ, 705 EX on 6/07/2014
Goal Score: 720-740 Across the board


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Established Contributor
bettercreditguy1
Posts: 745
Registered: ‎02-11-2012

Re: Loan consolidation effect on Fico

Your cc payment history weighs heavier on your Fico score than a consumer loan.You will lose points for the new inquiry and the new credit reporting categories. These can effect your score upto one year dependent on other items in your file. You would be wise to pay down your cc debt and if you are concerned, (Yes, in most states if you are married) they will want both of your siggys on the home loan), you would be wise to postpone your new home purchase until your score improves. This will do allow you to have some improved credit reporting and may qualify both of you for a lower home mortage rate. You will also need to pay any UNPAID collections before you apply as well. Even a small $100 unpaid bill looks very bad to underwriting especially if it is in any category except medical.  YMMV, your mileage may vary.

Starting scores 01/02/2012 EQ 707(Fico) TU 733(Fico) EXP 735 (FAKO)
Updated scores 06/01/2014 EQ 797(Fico) TU 768(Fico) EXP 769 (Fico), EQ 849 (Next Gen 5/27/14 Penfed)


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Frequent Contributor
Kozmo
Posts: 318
Registered: ‎07-08-2012

Re: Loan consolidation effect on Fico

I look at it from this perspective too.

 

If I pay down the balances, wait a few months after general use, those creditors may do a CLI for me. They wont right now because the balances are so high, but if I did look into a loan consolidation, I can try to get them to increase my CL's after lets say 3-4 months after they were paid down. Amex usually soft pulls and I have a pretty good contact with Chase who would likely SP as well.

 

Obviously I would wait to do that all after the mortgage (again, my wife will likely qualify on her own merit), but just in case I would wait.

 

 

And in terms of turning unsecured debt into secured debt...normally I would agree but im not worried about defualting and losing an asset. Again, things are just tight right now because of the wedding. Then buying a house will eat away at my budget...once things settle down I can pay down the loan faster. But it doesnt make sense to me to keep my balances high on my accounts for another 6-8 months. Especially at 12-15% when a loan I can get though my CU is 6%.

Moderator
Revelate
Posts: 8,394
Registered: ‎12-30-2011

Re: Loan consolidation effect on Fico

[ Edited ]

Generally speaking a loan for credit card consolidation can be an easy boost to one's FICO, plus being a smart financial decision; however, like anything credit related, YMMV.

 

AAoA, and mix of credit both factor and without more details anything is a swag; however, revolving utilization is the second most important factor in the FICO algoritm (after payment history) and refinancing that debt to an installment loan of some sort even if there's no reduction in APR, is usually smart for just FICO as installment loans are nowhere near as much penalty as credit cards... this is doubly true if you're securing it against an asset which would further reduce the APR, but make sure it gets paid.

 

Also in many cases one can do better than the 20ish% on most credit cards these days, and that makes it smart financially.  

 

Finally if you don't have any installment loans (personal, auto, mortgage, or possibly student) on your report, adding the installment tradeline may be a straight boost obviating the hit on AAoA with a plus to mix of credit.  If you already have installment lines, the new account is a straight negative, just a smaller one (usually) than the increase from the revolving debt being paid down; 70% isn't as bad as it could be, but it could be a non-trivial swing too. 

 

I'd still think very carefully about doing it, and also taking a hard look at what the difference is financially before doing so, but it's certainly worth looking into if your only goal is to pretty up yourself score wise for a FHA loan.  Remember FHA doesn't care at all as long as you're above the 640 boundary (it's somewhere around there) when it comes to your interest rate.

Starting Score: EQ 561, TU 567, EX 599* (12/30/11, EX lender pull 12/29/11)
Current Score: EQ 04 679, EQ 8 708, TU 711, EX 702* (07/14/14, EX older)
Goal Score: 700 on EQ '04 (01/01/15)


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Frequent Contributor
Kozmo
Posts: 318
Registered: ‎07-08-2012

Re: Loan consolidation effect on Fico

Thanks for the info.

I do have some student loans.

I have 5 cc's, 2 of which are in great shape. The other 3 have high until, apr 's are pretty good (9.9%,11.9% and 16 for Amex).

Any merit to the idea I proposed? Obviously I'm taking a risk but what if I consolidated, and then after 3-4 months of keeping the balances low/0 try to do a cli? Not sure if it would work but that could help as well, no?

I could easily wait until after the mortgage is taken out. Like I said before my soon to be wife should be able to qualify on her own. I don't have 2 years of employment history at my current job so I can't apply anyway. Unless they allowed me to be a co borrower. But with lower fico scores it wouldn't make sense if she can qualify on her own.

I'm going to need a new car this summer too at some point. Would hate to have a fico of 660 trying to do that. Guess its too hard to say what would happen in my hypothetical.
Moderator
Revelate
Posts: 8,394
Registered: ‎12-30-2011

Re: Loan consolidation effect on Fico

[ Edited ]

If you're absolutely confident you're not going to be on the mortgage then not sure it matters on the assumption you can pay down the balances at some point.  If you can reduce the APR by a non-trivial amount, then it's worth doing, if not, I'd pay it straight.

 

If you're still thinking about trying to be on the mortgage then it's a little more interesting... and FWIW as I'm a mortgage idiot, I don't think it's 2 years at current job at all from the guidelines, think it's more 2 years documentable work history but I'd look into that if I were you.

 

May have some merit but I'd ask two questions:

- What's your current FICO (specifically EQ Beacon 5.0 if you know it from here or elsewhere, it's the legit mortgage score and the only EQ FICO that's publically available to my knowledge)

- How soon is "soon?"

 

Your APR's aren't that ugly all things considered, unsecured personal loan from a credit union I think may run in the 9-10% range so that's sort of a wash depending what your balance distribution is; however, getting an unsecured personal loan is one of the more challenging loans to obtain honestly and if you're below FHA requirements anyway...

 

CLI's are so dependant on lender might as well use a Oujia board.  Amex probably would prefer you pay it off with regards to CLI's; other two YMMV and CLI chasing is definitely a question for the Credit Cards board.

 

Regarding soon, if you're talking 6+ months it doesn't matter much; however, less than that favors sitting pat depending how quickly you can pay the CC's down to pre-mortgage.  Also if you're above 640 anyway, no real point with regards to FHA unless you two want the option of a conventional mortgage.

 

Starting Score: EQ 561, TU 567, EX 599* (12/30/11, EX lender pull 12/29/11)
Current Score: EQ 04 679, EQ 8 708, TU 711, EX 702* (07/14/14, EX older)
Goal Score: 700 on EQ '04 (01/01/15)


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Valued Contributor
Jazzzy
Posts: 2,678
Registered: ‎07-29-2009

Re: Loan consolidation effect on Fico

Keep in mind that the credit union might require that you close any cards you will be paying off. They may not want to take the chance of zeroing out those balances just to see you run them back up again and have twice the debt you started with. That's how some credit card consolidation loans work.


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