topic Ideal utilization for installment loan in Understanding FICO® Scoring

Ideal utilization for installment loan

Anonymous — Fri, 10 Oct 2008 14:48:30 GMT

I've seen the figure 35% of original balance for installment loans. Does it matter if it is a student loan or a car loan? Does anyone know if it has tiers (like 35% one level and 25% is another level)?

Re: Ideal utilization for installment loan

Anonymous — Fri, 10 Oct 2008 16:34:57 GMT

No tiers. There is no such thing as good utilization on an installment loan. Paying on time every month is the only benefit.

People say there is a percentage, but I have never seen one. My scores have been the same with 20% left of my car loan as they were with 95% of my car loan.

Re: Ideal utilization for installment loan

Anonymous — Fri, 10 Oct 2008 21:11:25 GMT

I think there is a minor undetectable difference that you would normally attribute to other things. It is a tiny fraction of revolving util's power. Anything under 100 percent down to maybe 10 will probably keep you in the same 10 point ballpark all things being even.

Re: Ideal utilization for installment loan

Junejer — Sat, 11 Oct 2008 01:20:01 GMT

I wouldn't argue with either mel or DIG on their answers. FICO gives that argument, but I have yet to see any evidence of it. I have even heard of people paying down to 35% to see and nothing, nil, zilch, nada, zero...

Edit: Fix spelling error

Message Edited by ByrdMan on 10-10-2008 08:20 PM

Re: Ideal utilization for installment loan

marty56 — Mon, 13 Oct 2008 12:12:53 GMT

On my new autoloan, I got a score hit until I made my first payment so IMHO I would say that 1% is the same as 99%.

Re: Ideal utilization for installment loan

CreditAble — Mon, 13 Oct 2008 15:57:16 GMT

@marty56 wrote:
On my new auto loan, I got a score hit until I made my first payment so IMHO I would say that 1% is the same as 99%.

I believe the big variable is having prior installment tradelines with a minimum of two year on time payment history. I will guess that your credit files have at least two installment loans, each with two year payment histories. Furthermore if you didn't get dinged for 99% I believe that you would have to have one or more paid off installment tradelines in file.

From my experience the overall utilization on more than one open installment loan makes a big difference.

By any chance when you opened the installment tradeline, did you have an existing installment trade line open with a substantially reduced utilization? I know for a fact that average utilization of two installment loans can count big for scoring. I paid off an installment loan when my other installment loan was over 80% util, and I took a 38 point hit.

I am absolutely convinced that lower total utilization on multiple revolving tradelines may count a lot toward scoring, especially if there are no prior paid off installment loans in file.

It would be interesting to know how extensive your prior installment loan history is because your experience is definitely not the same as mine. There has to be some other major variable.

There is no way I will never pay off an installment loan early if it has a utilization below 15% and I have another open installment loan above 70%.

BTW the biggest hit was TU.

The loan that was paid off early was my first installment loan and the remaining open loan was my second installment loan. I have read that 80% utilization on an installment loan can hurt. Perhaps scoring buckets come in to play after one has one paid off installment loan.

Would anybody out there have any info or opinions about the influence of buckets on the importance of installment loan balances on credit scores?

Message Edited by CreditAble on 10-13-2008 11:57 AM

Re: Ideal utilization for installment loan

Anonymous — Mon, 13 Oct 2008 16:25:49 GMT

I'm curious also if "buckets" have anything to do with it.

Re: Ideal utilization for installment loan

borg_cube — Thu, 16 Oct 2008 04:02:35 GMT

Oh crap. I just paid off the remaining $2800 of a $36000 car loan I've had for 36 months and bought a new car on a 100% credit installment plan, 36 months at 0%.

The CRA's have not yet updated to show that the old car loan is now paid off.

Looks like I'll be an unwilling guinea pig here and will report back if I get a hit.

Also looks like I'll have to come up with a few thousand dollars to get the new one below 80% to truly test this out.

Happy to oblige!

Re: Ideal utilization for installment loan

haulingthescoreup — Thu, 16 Oct 2008 11:16:59 GMT

I got a ding on the very first time that my auto loan reported, because by definition, it was at 100%. By the next statement, the ding was gone. I think I had reduced the principal by a whopping $90 or so, lol.

Re: Ideal utilization for installment loan

CreditAble — Thu, 16 Oct 2008 13:23:38 GMT

@borg_cube wrote:
bought a new car on a 100% credit installment plan, 36 months at 0%.

.....Also looks like I'll have to come up with a few thousand dollars to get the new one below 80% to truly test this out.
All is not lost. At least you didn't pay a down payment for the new car loan. I will never use a down payment for a new car in the future. I would use the down payment money to reduce the new loan balance substantially in the first few months.

While you are waiting on your credit score update, now is a good time to contact the loan issuer and ask the most important question. "Will extra (early) payments be credited as prepayments of payments due and NOT reduction of principal?"

Specifically ask if you will be able to skip payments in the future that are made early. That way you can pay double or triple payments until the score gets where you want it to be. You can then skip some subsequent payments if you want to (to take advantage of the $0 interest).

borg_cube wrote:
Looks like I'll be an unwilling guinea pig here and will report back if I get a hit.

Happy to oblige!
I definitely will appreciate the info. Remember prior paid off installment history info is important also in order to draw more accurate conclusions.

Re: Ideal utilization for installment loan

borg_cube — Thu, 16 Oct 2008 16:22:40 GMT

Payments made early: I believe I have an answer to that without even contacting Toyota Financial. The loan calls for equal payments of $484 over 36 months. I've set up auto pay for $500 per month and thus far have made three payments. Each subsequent statement has been reduced by the extra $16. I suppose the question now is will the statement reflect a credit of sorts if the amount paid exceeds what is due for that statement period. Hmmmm..... Wouldn't mind finding out, but extra payments would be better applied to my mortgage. Unfortunately, I wasn't able to secure a 0% interest rate on my house!

Re: Ideal utilization for installment loan

CreditAble — Thu, 16 Oct 2008 19:39:53 GMT

@borg_cube wrote:
Payments made early: I believe I have an answer to that without even contacting Toyota Financial. The loan calls for equal payments of $484 over 36 months. I've set up auto pay for $500 per month and thus far have made three payments. Each subsequent statement has been reduced by the extra $16. I suppose the question now is will the statement reflect a credit of sorts if the amount paid exceeds what is due for that statement period. Hmmmm..... Wouldn't mind finding out, but extra payments would be better applied to my mortgage. Unfortunately, I wasn't able to secure a 0% interest rate on my house!

In that case here is what I would do. If my score took a big hit when the tradeline reports, I would pay an extra $500 or a $1,000 and wait to see what the score does the next month. If the score is unacceptably low the next month I would pay another extra $500 or $1,000.

I would then observe each month when the next payment is due. There might be a certain number of maximum numbers of months that the system will automatically credit over payments so as to reduce subsequent automatic payments. If there was a limitation, three months would be my guess. Rinse and repeat. At any time your Fico score is acceptable, stop paying the extra amounts, and hopefully the system won't auto deduct any funds that were prepaid until you have reached the "next payment due month". If that happens you can reallocate the prepaid funds towards mortgage reduction or whatever since there wouldn't be any auto payments for a couple / few months.

I wouldn't bother calling anybody with questions because the computer might automatically push the next due date a couple of months in the future anyway. Talking to people might get the account flagged with the due dates reset to the following month even if a couple monthly payments were paid in advance. This could definitely happen on a 0% interest account. It is not in the lenders interest to allow skipped payments after a few payments get paid early.

SunTrust noticed that my next payment was due a year away with a 5% balance and redid the whole computation to make the next payment due the following month. They have changed the company policy of allowing unlimited prepayments and allowing deferred payments for an equal number of times. I will be forced to make my last payment this month a year early. That means no more open installment loans for me. I will be interested to see how that affects my scores.

Message Edited by CreditAble on 10-16-2008 03:39 PM

Re: Ideal utilization for installment loan

borg_cube — Thu, 30 Oct 2008 15:34:32 GMT

Update:

The tradeline for Experian now shows the account paid off and closed. My Experian score went up 21 points and that's the only change to any of the accounts in the last 30 days.

It will be interesting to see if a similar thing happens with Equifax. TU did not report this account.

I'll let you know.

Thanks,

Borg_Cube

Re: Ideal utilization for installment loan

CreditAble — Fri, 31 Oct 2008 04:59:26 GMT

@borg_cube wrote:
Update:

The tradeline for Experian now shows the account paid off and closed. My Experian score went up 21 points and that's the only change to any of the accounts in the last 30 days.

Thanks for the update. It sounds like very good news if Toyota is already reporting.

Is the new (Toyota Financial) tradeline reporting to Experian and what % is the utilization?

Did you have a prior paid off car loan (of at least 24 months duration) before the one that you just paid off?

That is supposed to be a key factor concerning installment loans effect on credit scores.

If Toyota is reporting and you only have one (recent) paid off installment loan I wouldn't expect your score to go up. If you have a total of at least two paid off installment loans and Toyota is reporting then that might explain why the score went up. Many here feel that the balance on an installment loan has little effect on FICO.

I believe that the effect would be minimal only if there was a history of two priors. How much of an installment history do you actually have?

Thanks for the feedback.

Re: Ideal utilization for installment loan

borg_cube — Fri, 31 Oct 2008 06:08:56 GMT

CreditAble,

Toyota has been reporting to all three agencies since July. Utilization is approximately 91%. I do have a previous paid off car loan but it's not recent and goes back to 2001. That is also the oldest installment I have.

My wife has a similar situation, although she has another car we recently purchased showing on her credit reports that does not appear on mine. So, she now has two new car loans within the last four months plus the installment loan we just closed. I'm waiting to see what happens there and will report back as well. FWIW, her scores are already slightly better than mine, so it will be interesting to compare.

I'll let you know.

Thanks,

Borg_Cube

Re: Ideal utilization for installment loan

CreditAble — Fri, 31 Oct 2008 19:52:01 GMT

For many years I had been advocating....

....the "best FICO practice" of having two paid off installment loans, with a minimum of 24 months of payment history each. That info came from early interviews with a scoring spokesman.

As long as those two closed tradelines remain in file, usually for 10 years, subsequent installment loans should (supposedly) create no real adverse affect to FICO scores. It seems your data has borne that out. It is also possible that "high installment utilization" might pose relatively little problems for FICO scores if prior good payment histories are in file.

Possibly average utilization of all open installment taradelines is a big factor until the two paid installment are in file. That could account for my own score plunge when my first installment loan was paid off leaving a high balance on my second one.

When I first read about relative risk to a lender (installment / revolving) the explanation was that a person with no installment history was somewhat riskier when obtaining his first installment loan. A person short on cash to make loan payments could always make a minimum payment on a revolving account and then charge more thus making it easier to stay current. Making installment loan payments on the other hand did not increase the consumer's ability to have more to spend. That would create a greater likelihood of becoming delinquent on an installment loan. High percentages of the original loan amount still due was therefore deemed a high risk factor. As the installment loan was paid down the risk factor of default was substantially reduced.

Paying off two tradelines over two years each seems to be what it takes to assure the system that installment loans are no riskier than revolving tradelines in a consumer's file.

If that assumption is correct, and considering your feedback, installment loans should not cause any major score dings even for high utilization so long as two paid tradlines remain in file. I still have that installment 80% utilization threshold in mind. My scores definitely went up when I got down to 70-75%. They kept going up consistently as I rapidly paid down my balance, some times three payments in one month. Utilization may have only been relevant because I had only one prior loan.

Thanks for your feed back. I am glad that your score went up.

Re: Ideal utilization for installment loan

Anonymous — Sat, 01 Nov 2008 18:14:50 GMT

Does it have to say paid and closed? Some of my student loans have "refinanced", but they do have a $0 balance.

Re: Ideal utilization for installment loan

CreditAble — Tue, 04 Nov 2008 07:44:44 GMT

@Anonymous wrote:
Does it have to say paid and closed? Some of my student loans have "refinanced", but they do have a $0 balance.
I was waiting to see if someone else had any input. I myself would just ignore those tredelines. I can't imagine that accounts reporting $0 balances are hurting any.

I simply can't say for sure if the those accounts would count towards the two installment tradelines for a minimum of two years. I just don't know how "refinanced" would be treated. In any event I definitely wouldn't try to get the accounts "reworded". Any dispute to the credit bureaus might get the tradelines deleted.

It is entirely possible that the accounts might suffice for the two tradelines for two years as long as ontime payments had been made for at least two years. It is possible that the account might not have to be actually officially marked paid off. It could be that the $0 balance might be all that is necessary.

Re: Ideal utilization for installment loan

GFer — Tue, 04 Nov 2008 15:46:04 GMT

Refinanced = paid/closed

It's merely the selling of a loan. If the tl is sold--it's not active/open anymore.

Re: Ideal utilization for installment loan

Anonymous — Thu, 11 Dec 2008 16:49:54 GMT

Well I paid off the car loan last month and my credit score dropped a couple of points. I do have 2 installment loans left (student loans) that still have high balances. I'm thinking since the auto loan had a lower percentage left then paying it off raised my utilization percentage and cost me a few points.

Does this sound right?