topic Re: Opening and Immediately paying off a personal loan / score change in Understanding FICO® Scoring

Opening and Immediately paying off a personal loan / score change

Anonymous — Sat, 18 Nov 2017 17:42:10 GMT

Does anyone have experience or advice on what opening a 8k personal loan and then immediately paying off, so that it reports as paid and closed the first time it shows up on my credit report, wpuld look like in terms of scoring? I already have two installment loans.. a car and a mortgage. Will a closed account prevent the reduction in AAoA? Should I pay 95% and leave it open??

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sat, 18 Nov 2017 17:53:00 GMT

You have multiple things that it will affect:

New account penalty: if you haven't had any new accounts in 6 months, your score will go down for 6 months for having a new account.
AAoA will drop, even after the account is closed. After closing it, it will age on your profile for 10 years and affect AAoA as it ages.
Installment loan utilization while it's still open. Once it is paid down to what your installment utilization is before opening, it will hurt you a little bit. Once it's paid down below that percentage, it might help slightly. Once it's paid off and closed, it no longer affects installment loan utilization.
The inquiry or inquiries will hurt from 0-6 months the most, and then hurt less until they're 12 months old, after which they don't hurt FICO at all.
The closed and paid off account doesn't help you at all, except it thickens your file and in 2 years makes your AAoA stronger against new accounts, until the account ages off 10 years after closure. There's no other benefit to a closed installment loan.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sat, 18 Nov 2017 21:13:06 GMT

Thank you, ABC... So I take it I will still get dinged even if it shows first as a closed and paid account. My best then would then be #3 to leave it open and pay it down to 3%... as my current debt to credit limit percentage is 4%. I can pay the whole amount now, but it sounds like I might get a little benefit by leaving it open with a nominal balance.

Re: Opening and Immediately paying off a personal loan / score change

SouthJamaica — Sat, 18 Nov 2017 23:20:38 GMT

@Anonymous wrote:
Does anyone have experience or advice on what opening a 8k personal loan and then immediately paying off, so that it reports as paid and closed the first time it shows up on my credit report, wpuld look like in terms of scoring? I already have two installment loans.. a car and a mortgage. Will a closed account prevent the reduction in AAoA? Should I pay 95% and leave it open??

Your FICO scores would do better if you were to pay it down to 5%, rather than to zero, since as long as it's open it will help your installment utilization percentage. This is a big factor in FICO 8 and 9, and has some effect on other scores, even some of the mortgage scores.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 19 Nov 2017 01:12:57 GMT

Don't pay it down to your credit utilization percentage but to your loan installment utilization percentage.

Total up the original values of your installment loans. Divide into that number the remaining total balances on installment loans. That's your installment utilization. Pay it down to that.

But the new account penalty lasts for 6 months regardless.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 19 Nov 2017 01:29:08 GMT

Should I payit down to that or below that? I have a much utiliation rate on my car and mortgage than my credit cards.. So it definitely is better to be right at the current installment percentage or maybe perhaps just below?

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 19 Nov 2017 02:12:18 GMT

You already have big loans on which you owe most of the original debt. Taking out small loans and fiddling with the balances will therefore not help you.

Taking out a loan and then paying most of it off is a great idea but only if you have no open loans.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 19 Nov 2017 02:37:48 GMT

It's called the Share Secure Loan Technique.

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secure-technique/td-p/4506756

It's only really useful when you lack any open installment loans and want to improve your credit mix. Since you already have two active installment loans it will not help and the hard pull and reduction in AAoA will only hurt you.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 19 Nov 2017 03:01:30 GMT

OP, there's almost no benefit to you opening up a personal loan. Whether or not you pay it off and close it verses paying it down to 5%, it really doesn't matter. Paying it off right away won't do anything for your score. Zero. Your score rather will actually drop if anything due to the new account, possible AAoA reduction, definite AoYA reduction and inquiry. Paying it down to 5% likely wouldn't change your aggregate utilization across a threshold if you have a mortgage present (and auto loan to boot) and even if it did, you'd be talking a couple of points at best.

You're best suited scrapping the idea, as there is no real benefit.

Re: Opening and Immediately paying off a personal loan / score change

marty56 — Sun, 19 Nov 2017 12:48:03 GMT

If the loan is reported as a CFL loan, this could hurt you more. I would nenver open a CFL loan. Better to take a cash advance on a CC which is bad also.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 19 Nov 2017 13:02:13 GMT

Well unfortunately I already did it last month : / I am now trying to mitigate the damage.. The first payment is due on the 27th and I suspect it will be reported by first week in December I can pay it all off now and close ut before it posts, or leave it open with a small percentage down. I was a rocket loan by quicken.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Mon, 20 Nov 2017 01:58:27 GMT

Either way isn't going to significantly impact your credit score much, if at all since you already have several open installment loans.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Sun, 17 Jun 2018 09:02:55 GMT

Ok l took out two personal loans for hurricane repairs to non residential property and for some dental work. I do not currently have a residential mortgage to borrow against. These were taken out last April and May a bit over a year ago. The total amount of the 2 loans was 75000. By May of this year in anticipation of taking out a new residential construction loan for a waterfront house lot l have paid off both personal loans entirely and have zero debts, l pay off everything monthly so my debt to credit (over $56k in credit)percentages are around 1%. I have experienced a 20+ point drop in overall Fico scores but my middle Fico mortgage score only went down 4 points at 754, it was 758 prior. So my conclusion is the the FICO credit models are skewed against personal loans generally. I think this will change as more big lenders get into this market which is happening now and FICO cannot justify penalizing both lenders and the public from using personal loan tools. Other credit rating companies (Vantage) which l also subscribe to did show a drop in my overall score from 818 down to 794, but overall rate me 40+points higher on the 850 scale.
I think FICO will slowly change this bias as competitors and the lending markets address the huge accumulation of high interest private credit card debt. For myself my personal income to debt ratio is so strong l will take out my mortgage of around 300k and probably pay it off completely in 4 or 5 years.

Re: Opening and Immediately paying off a personal loan / score change

Anonymous — Mon, 18 Jun 2018 03:10:58 GMT

@Anonymous wrote:
Ok l took out two personal loans for hurricane repairs to non residential property and for some dental work. I do not currently have a residential mortgage to borrow against. These were taken out last April and May a bit over a year ago. The total amount of the 2 loans was 75000. By May of this year in anticipation of taking out a new residential construction loan for a waterfront house lot l have paid off both personal loans entirely and have zero debts, l pay off everything monthly so my debt to credit (over $56k in credit)percentages are around 1%. I have experienced a 20+ point drop in overall Fico scores but my middle Fico mortgage score only went down 4 points at 754, it was 758 prior. So my conclusion is the the FICO credit models are skewed against personal loans generally. I think this will change as more big lenders get into this market which is happening now and FICO cannot justify penalizing both lenders and the public from using personal loan tools. Other credit rating companies (Vantage) which l also subscribe to did show a drop in my overall score from 818 down to 794, but overall rate me 40+points higher on the 850 scale.
I think FICO will slowly change this bias as competitors and the lending markets address the huge accumulation of high interest private credit card debt. For myself my personal income to debt ratio is so strong l will take out my mortgage of around 300k and probably pay it off completely in 4 or 5 years.

You are mistaken. No FICO model penalizes personal loans especially (any more than auto loans or student loans, say).

What happened is that your FICO 8 scores took a dive because that particular model likes it when you have at least one open loan and when your loans are mostly but not not entirely paid off. You went from having partly paid off loans to no open loans of any kind which involved a double hit. You also mention that after your payoff you had zero debt of any kind -- if that meant also zero credit card debt you would have received a penalty there too.

The mortgage scores use different and much older models that don't look at whether most of your loans are paid off, so you saw much less of a hit there.

Curiously, there's a widely used technique here on the forums called the Share Secured Loan Technique -- which involves taking out a small personal loan and paying off most of it to get a big scoring boost in FICO 8. So far from FICO not liking personal loans, you can leverage personal loans to give yourself a substantial boost.