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Debt To Credit Ratio on Installment Loans?

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adelphi_sky
Frequent Contributor

Debt To Credit Ratio on Installment Loans?

I noticed while looking at my Equifax credit report that they record a Debt-to-Credit ratio for installment loans. These can be anything from auto loans, to mortgages. Correct me if I'm wrong, but I thought installment loans were different than extensions of credit that can be revolving and drawn upon. THere is no drawdown access with installment loans.

 

Could this ratio be affecting my score? When applying for credit I usually get responses that my credit utilization is high. Granted these responses are automated. Are these automated underwriting algorithms able to distinguish between installment loans and actual revolving credit when the credit agency is reporting a utilization ration on my installment loans? Anyone else notice this? 

 

Message 1 of 6
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Anonymous
Not applicable

Re: Debt To Credit Ratio on Installment Loans?

The thing you call debt to credit ratio is something that people here sometimes called "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

Total installment utilization is just one factor from this big scoring category ("Amounts Owed").  Revolving utilization is in the category too and is weighed much more heavily.  And as I say (and about which you asked) the two kinds of utilization are completely distinct.  Thus, if you have a big loan on which you owe most of the debt, that has no effect whatsoever on your revolving utilization.  There is no FICO scoring factor that combines revolving and installment debt in a single calculation.

Message 2 of 6
adelphi_sky
Frequent Contributor

Re: Debt To Credit Ratio on Installment Loans?


@Anonymous wrote:

The thing you call debt to credit ratio is something that people here sometimes called "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

Total installment utilization is just one factor from this big scoring category ("Amounts Owed").  Revolving utilization is in the category too and is weighed much more heavily.  And as I say (and about which you asked) the two kinds of utilization are completely distinct.  Thus, if you have a big loan on which you owe most of the debt, that has no effect whatsoever on your revolving utilization.  There is no FICO scoring factor that combines revolving and installment debt in a single calculation.


Thank you for your quick and detailed response. When my debt-to-credit ratio is high, it has no effect, but when I'm just about to pay it off when the ratio is down to 1% - 9%, I get points? What if I pay the loan off and the ratio is above 50%? Do I not get points for early payoffs? 

Message 3 of 6
Anonymous
Not applicable

Re: Debt To Credit Ratio on Installment Loans?

FICO rewards you for paying the loan down but keeping it open.  Paying it off causes it become closed, which removes it from the Total Installment Util calculation (remember that TIU counts only open loans).

 

Paying off a loan could help your TIU and thereby your score.  Example:

 

Mortgage.  Current Balance = 185k.  Original Loan Amount = 190k.

Personal Loan.  Current Balance = $500.  Original Loan Amount = 10k.

 

Do the math and you'll see that paying off the mortgage will cause your TIU to go from 93% (185.5k / 200k) to 5% ($500 / $10,000).

 

More often, however, paying off a loan will cause your TIU to go up.  Example:

 

Mortgage.  Current Balance = 8k.  Original Loan Amount = 190k.

Personal Loan.  Current Balance = 9k.  Original Loan Amount = 10k.

 

TIU before payoff was 17k/200k = 8.5%.  TIU after is 9k/10k = 90%.

Message 4 of 6
adelphi_sky
Frequent Contributor

Re: Debt To Credit Ratio on Installment Loans?


@Anonymous wrote:

FICO rewards you for paying the loan down but keeping it open.  Paying it off causes it become closed, which removes it from the Total Installment Util calculation (remember that TIU counts only open loans).

 

Paying off a loan could help your TIU and thereby your score.  Example:

 

Mortgage.  Current Balance = 185k.  Original Loan Amount = 190k.

Personal Loan.  Current Balance = $500.  Original Loan Amount = 10k.

 

Do the math and you'll see that paying off the mortgage will cause your TIU to go from 93% (185.5k / 200k) to 5% ($500 / $10,000).

 

More often, however, paying off a loan will cause your TIU to go up.  Example:

 

Mortgage.  Current Balance = 8k.  Original Loan Amount = 190k.

Personal Loan.  Current Balance = 9k.  Original Loan Amount = 10k.

 

TIU before payoff was 17k/200k = 8.5%.  TIU after is 9k/10k = 90%.


THat's a very interesting game they have us playing. I'd think paying off a loan early and saving tons of interest is better than worrying about ratios that would move your score 5 points up or down. I'll take the cash savings over a few points on a credit score. The only loan I've been told to keep open is a mortgage so that you get the deduction. Other than that, I see no reason to keep a loan open full term. 

Message 5 of 6
Anonymous
Not applicable

Re: Debt To Credit Ratio on Installment Loans?

If you are willing to, list all your loans, with your current balance and original loan amount.  We may be able to suggest a way for you to have almost no installment debt (and therefore pay almost no interest) and still get a lot of extra FICO points.

 

Loan 1.  Current balance = _____   Original amount = _____

Loan 2.  Current balance = _____   Original amount = _____

Loan 3.  Current balance = _____   Original amount = _____

etc.

 

PS.  The scoring advantage you get for having almost all your I-debt paid off (but not entirely) is more than 5 points.  It's about 30, compared with paying off all loans.

Message 6 of 6
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