What the heck is this

[scarfa21]

So I got my Penfed letter with the new score in a message, was 746 Pulled EQ, my question is one of the comments was Proportion of loan balances to loan amounts is too high.  What does this mean?  I dont have a loan, except a car loan but that cannot be affecting anything.  Thanks!!

[Anonymous]

One of the things FICO does is it compares how much you currently owe on your open loans against the total amount they were originally for.  FICO likes it a lot when it sees that your open debt is mostly but not entirely paid off. 

So suppose you had a 30k car loan and a 20k student loan (both open).  If your actual amount owed on them was 27k and 13k, then your "installment utilization" would be (27 + 13) / (30 + 20) = 40/50 = 80%.  As you paid both loans down (but kept them open) then that 80% figure would go down too.  FICO 8 likes it best when you have an open loan but your total installment utilization (TIU) is < 9%.

FICO 9 is much less well tested, so we can't say with certainty that the breakpoint for an ideal TIU is 9%.  But in lieu of data to the contrary it would be safe to assume that it is.   I believe that Penfed has switched to FICO 9 -- is that the model that is mentioned on your letter?

Final note: paying off a loan entirely closes it and therefore removes it from that calculation.  One therefore should be careful about paying off a big loan that was already mostly paid off.  It's an OK move, but it is important to know in advance that it will likely make your TIU go up (and therefore give you a scoring penalty).  There are clever ways around that, so if you ever get close to paying off a big loan, circle back with folks here and ask them about the SS loan technique.

[scarfa21]

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@Anonymous wrote:

One of the things FICO does is it compares how much you currently owe on your open loans against the total amount they were originally for.  FICO likes it a lot when it sees that your open debt is mostly but not entirely paid off. 

So suppose you had a 30k car loan and a 20k student loan (both open).  If your actual amount owed on them was 27k and 13k, then your "installment utilization" would be (27 + 13) / (30 + 20) = 40/50 = 80%.  As you paid both loans down (but kept them open) then that 80% figure would go down too.  FICO 8 likes it best when you have an open loan but your total installment utilization (TIU) is < 9%.

FICO 9 is much less well tested, so we can't say with certainty that the breakpoint for an ideal TIU is 9%.  But in lieu of data to the contrary it would be safe to assume that it is.   I believe that Penfed has switched to FICO 9 -- is that the model that is mentioned on your letter?

Final note: paying off a loan entirely closes it and therefore removes it from that calculation.  One therefore should be careful about paying off a big loan that was already mostly paid off.  It's an OK move, but it is important to know in advance that it will likely make your TIU go up (and therefore give you a scoring penalty).  There are clever ways around that, so if you ever get close to paying off a big loan, circle back with folks here and ask them about the SS loan technique.

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First, thank you for the reply.

Here is what is listed in the letter

Your credit score 746 Source: Equifax Date: 08/29/2017

The range of scores Scores range from a low of 300 to a high of 850

Is that the new Fico 09?

I only have a car lease, 1/5 years old, due to end 1/5 years.  Weird.

[Anonymous]

Here's a very recent thread about PenFed switching to FICO 9. 

http://ficoforums.myfico.com/t5/General-Credit-Topics/Penfed-changing-to-FICO-9/td-p/5029286

Your report was pulled after the date that PenFed switched (according to that thread).

PenFed used to use a very old model called FICO NextGen.  NG's scores were very different from the other models.  So the switch to FICO 9 is a really significant thing (much more so than a switch from FICO 8 to FICO 9).

You mention that the reason statement given still seems very "weird" to you.  Take a look at the examples I gave you.  Do the math and you'll see that your total installment utilization is very high right now.  (You are at year 1 of a 5-year auto lease.)  So probably about 80%.  As I explain, when your TIU goes down, that penalty will become less, and it will certainly be gone by the time your loan is mostly paid off (< 9%).

But FICO does like for you to have an open loan, so (as I also mention) circle back with us if you ever decide you want to pay that off and we'll give you a cool technique that creates the illusion of an open loan that is mostly paid off but which you can also keep open for a good five years.

[scarfa21]

Thanks!! its actually a 3 year lease, but Now I understand, thanks again for the help!.  Im not concerned as my score seems pretty good, was just confused as to that negative lol.

Sorry my stupid typing should of been 1.5 years and 1.5 years left on lease.

[Anonymous]

When you get within six months of paying that loan off, you may still have no other installment loans.  That's fine -- great in fact.  But bear in mind that FICO will not like it when you pay off that car loan (and have no other open loans).

So if it looks like that may be the case, here is the technique I mentioned earlier.  It's designed for people who have no open loans now or who will soon have no open loans.  It's a cool trick that enables you to have an open loan (that is almost entirely paid off) for a solid five years but pay almost no interest on it:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

[Anonymous]

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@scarfa21 wrote:

Thanks!! its actually a 3 year lease, but Now I understand, thanks again for the help!.  Im not concerned as my score seems pretty good, was just confused as to that negative lol.

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I personally wouldn't really view the presence of an installment loan at high utilization as a "negative" really.  Typically having a loan even at high utilization is going to be "better" for your score/profile than having no open installment loan at all.  Sure, you may be missing out on 15 points or so that you'll likely scoop up when the loan reports at 9% or less utilization, but definitely don't look at your loan as a negative thing.

[scarfa21]

Thank you all!!!

[scarfa21]

I also plan on leasing again right after.

[mitchblue]

It's wierd.. A car loan is good (mix of trade lines) and bad, high utilization  - then good once you get down to the last few months then bad once it's paid off. They're screwing with us. Lol.