topic Re: The remaining balance on my loans is too high ... seriously? in Understanding FICO® Scoring

The remaining balance on my loans is too high ... seriously?

Anonymous — Thu, 05 Apr 2018 02:25:25 GMT

Please have a look at the included excerpt from my recent FICO score report:

My FICO score was harmed because "The remaining balance on your ... loans is too high."

Notice that the "percentage of principal you have paid down" is 88%. So the remaining balance on my loans is only 12% of the principal. Is that too high?

Moreover, notice that "FICO High Achievers have paid down an average of 40% of the principal on their ... loans" which means that the remaining balance owing on the principal of their loans is 60% -- 5 times as much as the remaining principal on my loans.

I would like to know: By what stretch of the imagination is the remaining balance on my loans too high?

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Thu, 05 Apr 2018 02:32:45 GMT

Is this the only installment account you have? (Loans, car leases, finance agreement of furniture at rooms to go, etc.)

Did you pay off an installment account recently?

FICO 8 likes it best when your installment utilization is under 8.99%. When it is more than that, there is a penalty.

Re: The remaining balance on my loans is too high ... seriously?

sueblue34 — Thu, 05 Apr 2018 02:37:37 GMT

I get this all the time and I’m assuming mines stem from my school loans. I have no other installment loans except for my car which only have 3 payments left.

I just ignore it because to me it just feels like they have to find something.

Re: The remaining balance on my loans is too high ... seriously?

NRB525 — Thu, 05 Apr 2018 04:38:15 GMT

OP, what are your FICO 8 scores? What score version is this reason related to?

What other Reason Codes do you have that are listed for this same score model?

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Thu, 05 Apr 2018 04:50:16 GMT

If aggregate loan utilization isn't 91% or greater paid down, maximum scoring benefit isn't achieved, so a negative reason code can exist pointing that out. While 88% is very close, it's not 91% or greater.

If you pay down another 3% and it reports and you pull your reason statements again, you'll see that code go away.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Thu, 05 Apr 2018 09:44:56 GMT

Thanks for your reply.

I understand that FICO may draw a line in the sand - perhaps in this case it's 91% - below which my remaining principal balance is 'too high.' If that's the case, even paying 90% of the balance wouldn't be good enough.

However, by that measurement (91%) even FICO High Achievers have a remaining balance that's too high - way too high. If someone can be a FICO High Achiever and still have a 60% remaining balance, why is my score being lowered by a 12% remaining balance?

Further, as a practical matter, most borrowers haven't repaid 91% of the principal of their loan until they're very close to the end of the amortization period. Does that mean that their FICO score will be hurt for (let's say) 25 years when they take out a 30 year mortgage? That doesn't seem fair, particularly when a FICO High Achiever's score will be hurt for a lot less time.

Re: The remaining balance on my loans is too high ... seriously?

SwarthyOgre — Thu, 05 Apr 2018 12:23:25 GMT

I get the same thing listed under my possible negative factors and think it's just silly. My only non-mortgage installment loan is currently a 60 month car note of which i have paid it down to 33% and that is "too high"? Good grief. So if you've paid it off or only paid 90% of it you get dinged...I can see why the SSL trick is a thing. I'm glad I got a decent rate and don't have to worry about a refi.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Thu, 05 Apr 2018 13:00:00 GMT

@AnonymousI understand that FICO may draw a line in the sand - perhaps in this case it's 91% - below which my remaining principal balance is 'too high.' If that's the case, even paying 90% of the balance wouldn't be good enough.

However, by that measurement (91%) even FICO High Achievers have a remaining balance that's too high - way too high. If someone can be a FICO High Achiever and still have a 60% remaining balance, why is my score being lowered by a 12% remaining balance?

Further, as a practical matter, most borrowers haven't repaid 91% of the principal of their loan until they're very close to the end of the amortization period. Does that mean that their FICO score will be hurt for (let's say) 25 years when they take out a 30 year mortgage? That doesn't seem fair, particularly when a FICO High Achiever's score will be hurt for a lot less time.

Mortgages are viewed differently by the FICO algorithm than other installment loan types. It's believed that around 70% utilization remaining (30% paid down) is enough for maximum scoring benefit. The reason for this is because it often takes around 10 years of paydown to get to that point, which represents a significant length of time, usually longer than an auto loan for example.

While your score may be being surpressed 10-15 points by having an installment loan in place that's sitting at > 8.9% utilization remaining, it's important to understand that you're still seeing a 10-15 point benefit in having that installment loan in place over not having one at all.

It's also worth noting that there are High Achievers that have top-notch scores both with installment loans present at high utilization amounts or no installment loans open at all. Buffering allows one to achieve a perfect score while still having a factor in place that's actually holding back the score.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Thu, 05 Apr 2018 15:12:48 GMT

Also important for our OP to be aware that even aside from the buffer at the very top (which enables people to have scores in the 850-870 range but which are truncated at 850) the phrase "High Achiever" is probably being used to describe people with an 800 or above.

People in the 800 club have a wide variety of profiles. A person with an 840 score could take a 30 point penalty and still be well above 800. As BBS observes, some 800 club members have no loans, some have two loans on which they owe almost the entire amount, etc.

In terms of practical advice to the OP, we can help him better if he tells us what I asked originally, namely whether he has any other open installment accounts. The exact utilization on this loan considered by itself is much less important than all of his loans together.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Fri, 06 Apr 2018 08:07:53 GMT

After thinking about it:

The ridiculousness of saying that 12% of unpaid principle is 'too high' and the laughable comparison with FICO High Achievers are not weaknesses of the FICO algorithm itself but of the arbitrary and absurd explanations provided as reasons why someone's score was reduced.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Fri, 06 Apr 2018 15:08:23 GMT

@Anonymous
The ridiculousness of saying that 12% of unpaid principle is 'too high' and the laughable comparison with FICO High Achievers are not weaknesses of the FICO algorithm itself but of the arbitrary and absurd explanations provided as reasons why someone's score was reduced.

I guess it's sort of a glass half full glass half empty thing when considering this topic. I see the presence of an installment loan being a bonus to your score for having a more ideal "credit mix." The fact that you have one in place that's say 88% paid down is giving you (say) a 10-15 point bonus over not having it there. The additional half of that bonus simply comes when the loan is almost paid off.

I suppose the argument could be made that 8.9% is too low of a point for that final bonus to be realized, but what would you raise that to if it was your call to make, honestly? I couldn't see going higher than say 18.9%. The higher the threshold is set, the greater the risk exists that the person may default on that loan. The higher the percentage, the greater the dollars that are left to pay and the greater the time period is for that to be paid, so more can go wrong.

I understand the point that you're making and get your argument, but I happen to think the system we have in place now regarding open installment loans is just fine.

Where I think an arguement is better to be made is the common "it's ridiculous that you lose 30 points for paying off an installment loan." I've always thought that some portion of those ~30 points should remain, maybe 10-15 of them, if you have a closed installment loan on your credit report that's visible for potential lenders to see. While it isn't open/current, if they are able to see that you've successfully met the terms of an installment loan in the past, that to me represents slightly less risk than someone that has never experienced an installment loan before. Slightly less risk to me should be represented in one's credit score, but with our current system it is not.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Fri, 06 Apr 2018 17:27:20 GMT

Thanks for your thoughtful reply.

"I suppose the argument could be made that 8.9% is too low of a point for that final bonus to be realized, but what would you raise that to if it was your call to make, honestly? "

None of us know the details of the FICO algorithm so we're in no position to come up with an appropriate percentage. Nevertheless, apparently one can be a FICO High Achiever with 60% of your loan principal unpaid, so it seems that 8.9% or 12% (in my case) or something less than 60% should be right.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Sat, 07 Apr 2018 03:35:35 GMT

How are you defining "FICO High Achiever?" At least one 760 score as suggested by the sticky thread in this forum?

It's possible to have a 760 score, even an 800 or higher score with any sort of loan data. You could have no open loan present at all, a loan present at 1% utilization or a loan present at 100% utilization. Any of these 3 situations can result in someone having a 760 score, an 800 score, or even higher.

Re: The remaining balance on my loans is too high ... seriously?

Anonymous — Sat, 07 Apr 2018 05:46:49 GMT

http://www.fico.com/en/blogs/risk-compliance/whats-the-profile-of-high-credit-scorers/

It looks from this link as though FICO's PR dept has been defining it as 785 or higher.

As BBS and I have both mentioned, you can have an 800 with no open loans, with loans that are almost entirely paid off, or loans on which you owe almost the entire balance.

Profiles that generate a 785 or higher can vary even more widely.

In your case it's hard to guess what might be going on because we don't know whether you have any other loans, and if you do what they are, what their original loan amounts were and how much you owe on them now.