topic Re: How does a personal loan affect utilization? in Understanding FICO® Scoring

How does a personal loan affect utilization?

8bitmachinegun — Tue, 18 May 2021 17:16:17 GMT

I got an unsolicited offer from my credit union for a personal loan for a few thousand. The rate is substantially less than most of my credit cards, though it's close to the rate on my Navy Federal Platinum Card.

Right now my 'utilization' is getting close to percentage that will negatively impact my scores. If I use it to pay off some of my debt, will the extra $5000 simple be added to my overall 'available credit' or will it free up $5k of my existing credit, and be tracked separate from my CC debt?

Re: How does a personal loan affect utilization?

Slabenstein — Tue, 18 May 2021 17:40:00 GMT

Revolving utilization and installment balance-to-loan ratio are separate metrics, so personal loan balances do not count as part of utilization. Score improvement is one of the benefits of debt consolidation loans that fin serv sales ppl often tout, and for score 8 & 9 they do usually help b/c revolving util is weighted much more heavily than installment b:l on those versions. That the rates on personal loans usually beat credit card interest is also a finances > FICOs benefit.

Re: How does a personal loan affect utilization?

SouthJamaica — Tue, 18 May 2021 19:38:25 GMT

@8bitmachinegun wrote:
I got an unsolicited offer from my credit union for a personal loan for a few thousand. The rate is substantially less than most of my credit cards, though it's close to the rate on my Navy Federal Platinum Card.

Right now my 'utilization' is getting close to percentage that will negatively impact my scores. If I use it to pay off some of my debt, will the extra $5000 simple be added to my overall 'available credit' or will it free up $5k of my existing credit, and be tracked separate from my CC debt?

1. Installment utilization and revolving utilization are 2 completely separate metrics.

2. No it will not be added to your available credit.

3. If you take out a loan you will be resetting your age of newest account, lowering your average age of accounts, and adding at least one hard pull. So it's inadvisable to take out such a small loan. My advice: don't.

Re: How does a personal loan affect utilization?

Slabenstein — Tue, 18 May 2021 20:14:33 GMT

@SouthJamaica wrote:
3. If you take out a loan you will be resetting your age of newest account, lowering your average age of accounts, and adding at least one hard pull. So it's inadvisable to take out such a small loan. My advice: don't.

That's a very good point. Since we're talking about moving revolving debt to a new installment to avoid crossing a single util threshold, as opposed to using consolidation to cross many/all of them, OP might not come out ahead, FICO-wise.

Re: How does a personal loan affect utilization?

8bitmachinegun — Tue, 18 May 2021 20:43:55 GMT

Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

Re: How does a personal loan affect utilization?

Slabenstein — Tue, 18 May 2021 20:59:42 GMT

@8bitmachinegun wrote:
Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

How old is your oldest account, and how many reporting tradelines do you have? I think young and thin files usually see a greater impact from new inquiries and accounts. Bringing util down by about 10% might put your across one util threshold, depending on where you are at, so probably it wouldn't offset the impacts from opening a new account. Ofc, if you want to save some money on interest or lower your monthly payments by moving the debt over to a personal loan, those are real reasons to do so regardless of the potential FICO impacts. You could also look at moving all of your revolving debt over to an installment with a debt consolidation loan, tho that comes with its own kind of risk if you don't use it correctly.

Re: How does a personal loan affect utilization?

Anonymous — Tue, 18 May 2021 20:53:46 GMT

@8bitmachinegun wrote:
Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

Finances over FICOs - always prioritize what makes more financial sense rather than what is going to maintain or improve a score.

A 10% change in utilization is not likely to change your scores much, unless you are going over 89% utilization. If the interest rate on the loan is going to be lower than on your CCs then go for it, although it would be preferable to take a loan large enough to pay off all of your cards and keep those cards paid off using whatever strategy works best for you.

Re: How does a personal loan affect utilization?

SouthJamaica — Tue, 18 May 2021 21:39:24 GMT

@8bitmachinegun wrote:
Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

IMHO it would make a dodgy situation worse.

Re: How does a personal loan affect utilization?

Shooting-For-800 — Wed, 19 May 2021 11:07:07 GMT

I would just open another card with a balance transfer.

I just got SunTrust with a promo at prime (under 4%) for 3 years.

GL!

Re: How does a personal loan affect utilization?

Anonymous — Sat, 22 May 2021 00:31:33 GMT

@8bitmachinegun wrote:
Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

It depends on when you opened your last account, what is your AoYA/AoYRA?

But you are correct that second or subsequent new accounts have less impact than the first, and can potentially have none, depending on whether, vel non, thresholds are crossed.