topic Re: utilization -- pay down or off? in General Credit Topics

utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 13:20:23 GMT

I have a recent car loan with a 24k balance (26k original) with a $414 pmt that I can now pay off completely or just pay down. I pay off my Visa and AX completely every month, and have no other credit accounts with balances. Would it be better to pay off the auto loan completely, or just pay it down to, say, 5k so it stays open as an "good use of credit" factor?

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 13:34:44 GMT

Somebody will chime in here with more detail but my understanding is that good FICO scores are reliant of a mix of credit including installment lones. People usually take a modest hit when an auto lone drops off their reports completely. On your cards, you are actually better off showing a 1-9% balance on half/-half of you CC accounts each month.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 13:42:20 GMT

Maybe I'm old school, but why wouldn't you pay off something that you can afford instead of paying interest?

Keeping an unnecessary loan sounds like a rather expensive way to improve your credit score.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 14:13:06 GMT

Yes, that is why they don't let people like us run the credit bureaus...we think logically!!! We are dealing with that right now because we are ready to pay off my hubby's truck but don't want his score to drop. Isn't it ridiculous???

Re: utilization -- pay down or off?

wvasweetness — Thu, 06 Mar 2008 14:23:35 GMT

Yep - an auto loan dropping off "suddenly" will definitely mean a hit to your CR. We paid off an ATV 2 years early, which meant a 30-50pt decrease across the board.

It's sickening.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 14:26:54 GMT

danikasmom wrote:
Yes, that is why they don't let people like us run the credit bureaus...we think logically!!! We are dealing with that right now because we are ready to pay off my hubby's truck but don't want his score to drop. Isn't it ridiculous???

It IS ridiculous. We recently bit the bullet anyway and paid off our car 2 years early. Paying 9% interest was making me ill... a lot more ill than a score drop, that's for sure.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 14:41:22 GMT

First off, the answer depends on whether you are long or short on credit scoring. As we pay off loans etc, our score may dip a bit, but then picks up, and goes back up again.

For some people (like me at this moment) are looking for short term gains to get a better interest rate, qualify for a mortgage, refi, etc... and thus these short term drops hurt our goal of achieving one of the previous goals. So we will try and maximize the ideas we find on here to better our score in the short term.

For others (and hopefully all of us in the end), it is a marathon and not a short sprint. They do things now, that insure a payoff in the future (good scores and long history). And I would surmise paying off a loan (either early or on time) would be one of the goals of good financial responsibility.

Maybe this is a long and drawn out answer, but you have to decide what your goals are, short term and long term. Remember, if you fail to plan, you plan to fail.

IMHO, "IF" I had 24k sitting around, I would invest that money, as the car is a depreciating asset (ie it probably is not worth 24k right now, and won't be worth that ever), so there are better uses for that 24k...pay down your mortgage, buy some land...

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 15:05:56 GMT

HinH wrote:
IMHO, "IF" I had 24k sitting around, I would invest that money, as the car is a depreciating asset (ie it probably is not worth 24k right now, and won't be worth that ever), so there are better uses for that 24k...pay down your mortgage, buy some land...

This is true... but it also depends on what the interest rate of the auto loan is. We paid off the loan early and now put that car payment into savings, not a high yield account yet, but it will be soon.

I am a FIRM believer of not carrying debt. Period. The only interest I plan on ever paying will be for my mortgage... and that's not until I have a 20% or more down payment.

Re: utilization -- pay down or off?

BallBounces — Thu, 06 Mar 2008 16:13:36 GMT

danikasmom wrote:
Yes, that is why they don't let people like us run the credit bureaus...we think logically!!! We are dealing with that right now because we are ready to pay off my hubby's truck but don't want his score to drop. Isn't it ridiculous???

Wouldn't the TL still appear on your report as a paid and closed account, and still offer the benefit of credit history and account variety?

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 16:25:54 GMT

VistaV wrote:

danikasmom wrote:
Yes, that is why they don't let people like us run the credit bureaus...we think logically!!! We are dealing with that right now because we are ready to pay off my hubby's truck but don't want his score to drop. Isn't it ridiculous???

Wouldn't the TL still appear on your report as a paid and closed account, and still offer the benefit of credit history and account variety?

It should stay on the report for 10 years after opening the TL.

Re: utilization -- pay down or off?

BallBounces — Thu, 06 Mar 2008 16:57:38 GMT

massagemama wrote:

VistaV wrote:

danikasmom wrote:
Yes, that is why they don't let people like us run the credit bureaus...we think logically!!! We are dealing with that right now because we are ready to pay off my hubby's truck but don't want his score to drop. Isn't it ridiculous???

Wouldn't the TL still appear on your report as a paid and closed account, and still offer the benefit of credit history and account variety?

It should stay on the report for 10 years after opening the TL.

Right, so, why would the score drop immediately after paying off a loan .... .... .. .

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 18:16:10 GMT

The score would drop because even though your payment history will be reflected on your report from 7-10 years, the account will not have recent "on-time" payments made to it and the account will reflect as paid in full and closed. Doesn't make a whole lot of sense I know, but that is how it works.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 18:26:40 GMT

9% Interest is A LOT for a $24K loan. In my opinion I would pay it off. Yes you might have a short drop in your score, but who cares, at that interest rate you are paying about $180 a month in Interest.

Type in your search engine "Loan Amortization Chart" and put in the car note amount your monthly payment and interest. I did it for you, but I can't post the table. It basically says of that $414 a month $180 is INTEREST

Pay it Off then start putting $ into savings because their is no way you can get a better return on savings to justify the huge amount of interest you are paying.

Re: utilization -- pay down or off?

BallBounces — Thu, 06 Mar 2008 19:27:11 GMT

Blah2 wrote:
The score would drop because even though your payment history will be reflected on your report from 7-10 years, the account will not have recent "on-time" payments made to it and the account will reflect as paid in full and closed. Doesn't make a whole lot of sense I know, but that is how it works.

I guess I was playing devil's advocate to some extent here. In the real world, I think paying off loans with less favourable financial terms is worth it, despite a small and temporary negative impact to one's FiCO score.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 19:35:54 GMT

@wvasweetness wrote:
Yep - an auto loan dropping off "suddenly" will definitely mean a hit to your CR. We paid off an ATV 2 years early, which meant a 30-50pt decrease across the board.

It's sickening.

Same thing here. I/we paid of 2 auto loans last July, and scores dropped 32 points.

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 19:41:08 GMT

The reason, we suggest NOT paying off a car loan, is that FICO likes to see a mix of different credit instruments, like cc's, mortgage, etc. Revolving and installment the most important issues. The credit mix accounts for 10% of your FICO score. Loosing a component will cause a score drop. Look at the pie chart to see the importance of FICO scoring catagories:.........................

FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.

I refer to this daily.

Re: utilization -- pay down or off?

BallBounces — Thu, 06 Mar 2008 20:03:39 GMT

Sylviatob wrote:
The reason, we suggest NOT paying off a car loan, is that FICO likes to see a mix of different credit instruments, like cc's, mortgage, etc. Revolving and installment the most important issues. The credit mix accounts for 10% of your FICO score. Loosing a component will cause a score drop. Look at the pie chart to see the importance of FICO scoring catagories:.........................
FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.

I refer to this daily.

Sylvia, still, the crux of the question is "Does a paid account still facor in to the mix you described above?" The type of TL is still listed on your CR, even for a piad account. My contention is that this still represents a good mix of credit use, even if it is paid off. People should not be fearful of paying off 9% auto loans if there is a more prudent use for the money, or a more prudent way to carry the debt.

I mean, for example, by your own pie chart, "amount owed' carries far more imporetance than "types of credit". Let's not lose sight of the forest for the trees. (And good discussion by the way)

Message Edited by VistaV on 03-06-2008 12:03 PM

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 20:11:09 GMT

Sorry Vista, not trying to sidestep your question, just trying to get to as many people as I can.

Your payment history will remain on your accont for a full 10 years after payoff..

But it will not be counted in the mix of credit, as you have effectively lost that portion of the mix.

Does that help?

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 21:00:20 GMT

Great chart/nugget of information...needs to be pinned/saved somewhere for future references...thank you Sylviatob!

Re: utilization -- pay down or off?

Anonymous — Thu, 06 Mar 2008 21:40:50 GMT

It's in the Credit Education section of the black menu bar under the link "what's in your score".

This website, outside of the fourm, is a wealth of info unto itself.