New Installment Loan, Impact to Scores

[Anonymous]

So I am not the only one who has gotten the Amex Personal Loan offer for <$25k @ 6.87% .

I am considering taking a loan out, since my only installment loan is about to be paid off. 

I'm  curious though; at what percentage does FICO not see an installment balance too high? Since my last report pull, I still have a negative indicatior that says loan balances are too high on installment loans, but I owe 14% of the origination balance. I am just curious at what point does the help of a good [credit] mix offset that somewhat negative effect of seemingly high installment balance. (it seems like a weird, contradictory scoring parameter)  

I had thought about taking the loan out for about 30% more than I need, since there is no origination costs, and immediatly paying that 30% back to pad the effects. Thoughts? 

[Anonymous]

Here is what we know:

(1) There appears to be (very roughly) a 30 point penalty inside FICO 8 for having either (a) no open loans at all or (b) if most of the original amount of your open debt is still owed. 

(Example: a personal loan for 10k and a car loan for 40k.  You owe 6k on the personal loan and 40k on the auto loan.  Your "installment utilization" is 46/50 = 92%.  If you pay off the personal loan, your IU will increase to 40/40 = 100%.  IU counts only loans that are open.)

(2)  When the installment utilization is very high, you get no relief from that penalty.  (E.g. > 90%)

(3)  When the IU is very low (specifically < 8.99%) the penalty vanishes.

(4)  There might one or two breakpoints in between where the penalty is reduced but not eliminated.  If so, nobody has conclusively show where that would be and if so whether it is true for all profiles.

Your idea of taking a loan out for much more than you need and then immediately paying off a big chunk is a nice one.  If there are breakpoints above 8.99% (see #4 above) then that would help.  On the other hand it's only a reasonable idea if indeed you really need a big chunk of money for something.  If you do not actually need the money, but are simply trying to protect your score from a drop when you pay off all loans, there are far cheaper ways to do that.  (A big loan on which you pay 6.9% interest is a bad way to do that.)

[SouthJamaica]

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@Anonymous wrote:

Here is what we know:

(1) There appears to be (very roughly) a 30 point penalty inside FICO 8 for having either (a) no open loans at all or (b) if most of the original amount of your open debt is still owed. 

(Example: a personal loan for 10k and a car loan for 40k.  You owe 6k on the personal loan and 40k on the auto loan.  Your "installment utilization" is 46/50 = 92%.  If you pay off the personal loan, your IU will increase to 40/40 = 100%.  IU counts only loans that are open.)

(2)  When the installment utilization is very high, you get no relief from that penalty.  (E.g. > 90%)

(3)  When the IU is very low (specifically < 8.99%) the penalty vanishes.

(4)  There might one or two breakpoints in between where the penalty is reduced but not eliminated.  If so, nobody has conclusively show where that would be and if so whether it is true for all profiles.

Your idea of taking a loan out for much more than you need and then immediately paying off a big chunk is a nice one.  If there are breakpoints above 8.99% (see #4 above) then that would help.  On the other hand it's only a reasonable idea if indeed you really need a big chunk of money for something.  If you do not actually need the money, but are simply trying to protect your score from a drop when you pay off all loans, there are far cheaper ways to do that.  (A big loan on which you pay 6.9% interest is a bad way to do that.)

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Just one addition... this discussion is relevant to FICO 8, but it is a matter of debate whether the mortgage scores do or do not react to installment utilization percentage.

@E.g., @Revelate says EX FICO 2 responds slightly to it, and TU FICO 4 ignores it. My experience was that TU FICO 4 did respond to it, and more than slightly, while EX FICO 2 didn't budge.

[Anonymous]

@SouthJamaica,

Thanks, 

I think the confusing part is what happens why I still get warnings from the score reports from say, Amex and Discover (free score in account) that my Installment loan ratio is too high, when I am so far down the road of paying it down.. 

To answer your question, I do not need the loan, but I am also forward looking and dont think I can pay off a 0% I have floating on a CC before the rate expires. So My plan would be to borrow the large amount, pay the CC off, then pay the remaining extra cash back to the loan. In effect I have just moved the balance to a moderate interest rate personal loan while also padding the impact to my score...I think. 

Thanks for input, very helpful indeed. 

[jamie123]

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@Anonymous wrote:

@Anonymous I am not the only one who has gotten the Amex Personal Loan offer for <$25k @ 6.87% .

I am considering taking a loan out, since my only installment loan is about to be paid off. 

I'm  curious though; at what percentage does FICO not see an installment balance too high? Since my last report pull, I still have a negative indicatior that says loan balances are too high on installment loans, but I owe 14% of the origination balance. I am just curious at what point does the help of a good [credit] mix offset that somewhat negative effect of seemingly high installment balance. (it seems like a weird, contradictory scoring parameter)  

I had thought about taking the loan out for about 30% more than I need, since there is no origination costs, and immediatly paying that 30% back to pad the effects. Thoughts? 

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Don't forget that the only benefit of high scores is to be able to get lower interest rates on loans. Once your scores are above 760 it really makes no sense to get an installment loan just for the extra points.

[SouthJamaica]

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@Anonymous wrote:

@SouthJamaica,

Thanks, 

I think the confusing part is what happens why I still get warnings from the score reports from say, Amex and Discover (free score in account) that my Installment loan ratio is too high, when I am so far down the road of paying it down.. 

I got that warning continually, even when it was down to 15%. It only went away when I got it down to 9%.

To answer your question, I do not need the loan, but I am also forward looking and dont think I can pay off a 0% I have floating on a CC before the rate expires. So My plan would be to borrow the large amount, pay the CC off, then pay the remaining extra cash back to the loan. In effect I have just moved the balance to a moderate interest rate personal loan while also padding the impact to my score...I think. 

Thanks for input, very helpful indeed. 

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