topic Two installment loans - Should I pay one off early? in Understanding FICO® Scoring

Two installment loans - Should I pay one off early?

Maslow2010 — Tue, 12 Jul 2022 03:12:45 GMT

Thank you in advance for any and all wisdom. I would like to avoid having my score drop if I pay off one of my installment loans early.

I have two installment loans. One from CARMAX, original loan anount 21k, outstanding balance of 13,700 after 24 payments. I make the required, scheduled payment on time every month.

Second installment motorcyle loan from Freedom Road. Original loan amount $10,063 opened August 2021. It is a 36 month loan with a $302 payment. I have been paying approximately 1000 per month on this loan, as of today the balance after 11 payments is $1900.00. I was planning on paying off this loan at the end of this September (2022).

My Experian Fico Score 8 is 678 as of this writing. I have four credit cards with available credit of 22,600.00 I am utilizing 17% of my available credit. All credit card balances are zero except on one card.

I need to move and rent a home at the end of this year, thus the concern about a score drop. Is it a bad idea to pay off the Freedom Road loan prematurely? If i do so I still have the one CARMAX installment loan as part of my credit mix. I've read on this forum about the "9%" rule regarding installment loans but am unclear that concept. Is it better to have two current installment loans as part of my credit mix? I could readily stretch out the Freedom loan another six months if need be.

Thank you in advance.

Re: Two installment loans - Should I pay one off early?

SouthJamaica — Tue, 12 Jul 2022 03:31:12 GMT

@Maslow2010 wrote:
Thank you in advance for any and all wisdom. I would like to avoid having my score drop if I pay off one of my installment loans early.

I have two installment loans. One from CARMAX, original loan anount 21k, outstanding balance of 13,700 after 24 payments. I make the required, scheduled payment on time every month.

Second installment motorcyle loan from Freedom Road. Original loan amount $10,063 opened August 2021. It is a 36 month loan with a $302 payment. I have been paying approximately 1000 per month on this loan, as of today the balance after 11 payments is $1900.00. I was planning on paying off this loan at the end of this September (2022).

My Experian Fico Score 8 is 678 as of this writing. I have four credit cards with available credit of 22,600.00 I am utilizing 17% of my available credit. All credit card balances are zero except on one card.

I need to move and rent a home at the end of this year, thus the concern about a score drop. Is it a bad idea to pay off the Freedom Road loan prematurely? If i do so I still have the one CARMAX installment loan as part of my credit mix. I've read on this forum about the "9%" rule regarding installment loans but am unclear that concept. Is it better to have two current installment loans as part of my credit mix? I could readily stretch out the Freedom loan another six months if need be.

Thank you in advance.

1. Assuming you have no other loans, from a pure scoring point of view, the optimum thing for you to do is to not pay either off completely. If the 2 loans are open, when their combined balances get down to 9%, or $2795.67, you'll be in the installment utilization sweet spot, which should get you a nice scoring bonus in your FICO 8's and 9's. Then if you get the car loan down to $1890.00, or 9% of its original amount, you can safely pay off the motorcycle loan, and may even pick up a few points for doing so since you'll have one less "account with a balance". So I guess you should cool it in terms of prepaying the Freedom Road loan and use the money towards your car loan or your credit cards.

2. This is all about installment utilization. It has nothing to do with credit mix, because a closed loan in your reports is as good as an open loan to satisfy the credit mix component.

Re: Two installment loans - Should I pay one off early?

Maslow2010 — Tue, 12 Jul 2022 18:10:43 GMT

Thank you for the clarification regarding credit mix vs utilization.