topic Re: How does FICO view refinancing? in Understanding FICO® Scoring

How does FICO view refinancing?

Anonymous — Mon, 25 Aug 2008 16:02:43 GMT

DH & I just got a new auto loan at 8% interest. I'm considering refinancing some time in the future with the local credit union to get a better interest rate.

Before we do that, I was wondering whether refinancing an auto loan is looked at negatively by FICO. I don't have a clue.

Re: How does FICO view refinancing?

athensguy — Mon, 25 Aug 2008 16:31:53 GMT

Generally a refi is considered to be a new loan, and the old loan will show as closed-paid.

Re: How does FICO view refinancing?

Anonymous — Mon, 25 Aug 2008 16:43:18 GMT

That's GREAT news! Exactly what I was hoping for.

Thanks, athensguy

Message Edited by Phoenix-rising on 08-25-2008 11:43 AM

Re: How does FICO view refinancing?

athensguy — Mon, 25 Aug 2008 16:52:36 GMT

You're welcome.

And yes, the only hits you'll take are for a new account and for the inquiry or inquiries required. Nothing drastic.

Re: How does FICO view refinancing?

CreditAble — Mon, 25 Aug 2008 18:08:59 GMT

Phoenix-rising wrote:
DH & I just got a new auto loan at 8% interest. I'm considering refinancing some time in the future with the local credit union to get a better interest rate.

Before we do that, I was wondering whether refinancing an auto loan is looked at negatively by FICO. I don't have a clue.

There is something called the ratio of outstanding balance to original loan amount for installment loans. It is similar in concept to "utilization" for revolving tradelines. Frequently an auto loan with more than 80% of the original amount still owed will negatively impact the FICO score. I personally will never pay a down payment for a car loan ever again for that reason. Any future purchases will be no money down and at least 20% of the original loan repaid the first month the loan is in force.

When you refinance your loan, if the outstanding balance is substantially less than 80% of the original amount, you would probably see a score drop at that time. You could save up some money so that you would have 20% extra to pay towards the new loan should you be able to get a lower rate loan in the future. If you decide not to refi in the future, you could use the extra money to pay down your existing loan and lower the "utilization" even further at that time.

One more thing worth considering. Paid off installment loans of less than two years duration do not help your FICO (Installment weighted) score.

The reason is as follows. If a person has no history of repaying installment loans,

how does FICO know the odds that the consumer will repay his first auto loan?

If a person borrowed $1000 (24 month installment loan ) and returned it to pay off the loan in the following month that certainly doesn't provide evidence that he can handle installment loans responsibly.

Would on time payments for three months and then paid off be a better indication? Not really. Six months? One year?

The correct answer seems to be Two Years.

It seems that having two paid installment loans with at least two years of on time payments each is the goal FICOwise. Subsequent installment loans (possibly including mortgages) should then be (somewhat) easier to obtain at favorable rates since (installment) FICO would be higher. Furthermore those subsequent loans should negatively impact FICO less since there is a robust history of installment loan repayment.

If a person wants to maximize FICO, he should consider carefully the downside to paying off installment loans early if he doesn't have a 2x2 prior history.

If you really want to maximize FICO, and you don't have any other installment loan history, I would save as much extra money as possible in an interest bearing account while paying down the auto loan on time for two years. I would then refi and use the extra money to pay down the new loan in the first month and continue paying the new loan for at least two years before paying it off.

Of course with your stated FICO scores I would just do whatever saved me the most money in interest and not be concerned with what happens to the scores. But you did ask a specific question and I gave you a specific answer. Then again if you were going for a mortgage in three or four years and don't have any installment history right now, my plan might just save you some money in the long run.

Message Edited by CreditAble on 08-25-2008 02:08 PM

Re: How does FICO view refinancing?

Anonymous — Mon, 25 Aug 2008 19:20:32 GMT

Saving $$ takes priority over FICO every time.

Re: How does FICO view refinancing?

Anonymous — Mon, 25 Aug 2008 19:28:44 GMT

Great info CreditAble. I always wondered what the tricks to auto loans were. Thanks for all the information.

I had 2 previous auto loans that are PIF, but both were paid early. One was due to selling my car to my son and the other was traded-in. Last year (June & November) I got 2 new auto loans. The June loan has a good chance of going to term (or at least 2 years), but the November vehicle was just traded in.

My FICO scores are good, but I'd bet my auto-enhanced scores aren't quite as pretty. The auto loan I just got last week was my 5th since Dec. 2005. I plan to pay down 1/3 of the loan in the next few months and then try to refinance with the local credit union, which I'm joining this week.

Re: How does FICO view refinancing?

AyalaZero — Mon, 25 Aug 2008 21:57:44 GMT

Ok, question. I have two current Installment Loans, one has been active for over two years, and one (ATV - Motorcycle) has been active since March of this year. I plan to pay off the new loan in April of this upcoming year, my other installment will run its full-term (until Sep 2010). When I purchased my motorcycle, I was told that as long as you have it on your credit for 13+ months it will take the full effect on my credit score. It kinda makes sense...to me? Does this sound right to anyone else? If no one knows for sure, I will most likely pay it off and see what it does to my score. Then I will report.

Re: How does FICO view refinancing?

haulingthescoreup — Mon, 25 Aug 2008 22:47:48 GMT

With a new auto loan, or I suppose any other installment product, there is a one-time score hit for being at 100%. As soon as the first payment hits, that goes away. (I got dinged by EX for this, and the report explicity referenced the util. Next month, gone, and it never came back.)

Re: How does FICO view refinancing?

CreditAble — Mon, 25 Aug 2008 23:59:41 GMT

AyalaZero wrote:
Ok, question. I have two current Installment Loans, one has been active for over two years, and one (ATV - Motorcycle) has been active since March of this year. I plan to pay off the new loan in April of this upcoming year, my other installment will run its full-term (until Sep 2010). When I purchased my motorcycle, I was told that as long as you have it on your credit for 13+ months it will take the full effect on my credit score. It kinda makes sense...to me? Does this sound right to anyone else?
By the numbers.

#1. With no installment loan history on a credit report there are points deducted by Fico.

#2. With only one installment loan of two years minimum duration there are still points being deducted but possibly fewer points are deducted.

#3. With one installment loan of two years minimum, and one installment with 13 months duration, there are still some points being deducted.

#4. Two installment loans x 24 months...no points at all deducted for insufficient installment history.

At least that is the way I understand it and the best way I can explain it.

I have never heard anything about 13 months being significant. Thirteen months might be significant to a person who sold you the loan if he receives a commission based upon the amount of interest paid in the first year.

Re: How does FICO view refinancing?

haulingthescoreup — Tue, 26 Aug 2008 00:14:54 GMT

My 20-year-old daughter's scores took 15-20 point jumps when her student loans appeared. All that she had before that were credit cards.

In some scoring buckets, the scoring formula actually wants you to add credit. One good way of seeing what's what is to play with the simulators on EQ and TU --slide down to the options involving applying for and getting new credit.

The sims predicted her score increases.

It's very important to realize that each person's scores react in individual ways, depending on their particular credit profile.