Personal Loan and Mortgage

[Anonymous]

Hi,

I have a secured personal loan that is about to be paid in next 2 months. I am thinking to apply for mortgage soon. Will it be wise to pay this personal loan before the mortgage application? How would this affect my FICO score? Since the loan is most recent account in my credit histrory, closing it may improve "length of credit history" but then only credit cards will remain on my profile so that may affect the "credit mix". Does the FICO score used in mortgage application look in active accounts to decide credit mix? Your advice is highly appreciated. Thank you.

[Appleman]

Welcome to the myFICO forums!

My opinion would be to leave the personal loan as it should be boosting your score at this point. You will likley see a drop when it reports paid in full.

The only reason to pay off early would be if your DTI (Debt to income) is too high and that paying it off would help.

Make sure that you are doing everything you can to keep the credit balances down but let one card report each month with a 1 to 9% balance to see the maximum score.

Good luck!

[Anonymous]

Thank you for the advice. I was impatient and felt nobody has say on this matter.

Yesterday I have paid the personal loan in full. Let's see what happens with my score now. 

[Anonymous]

Was your secured personal loan your only open installment loan?

For example, did you have a car loan?  Mortgage?  Student loan?

If your personal loan was your only open installment loan, then paying it off will cause your score to take a big dive.  Fortunately, there's an easy solution if it was your only open loan.  We will need to get you started on that solution soon, however.

[Anonymous]

Oops, That was the only open loan account I had.

I was in two minds. Feeling bad about my stupidity.   

[Anonymous]

Don't feel bad and don't say bad stuff about yourself.  It's not at all obvious how FICO would run its scoring; it's often the opposite of what a reasonable person would guess.

But like I said, the problem is very easy to fix.  Read the first post in this thread.  If it sounds like the right approach for you, then read posts 2 and 3 in the same thread and then get to work.  You want to get your new loan set up ASAP before you start going to mortgage lenders.

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

[Anonymous]

Thank you for the encouragement and sharing your informative post.

At this stage if i opt for that approach, I worry  the new loan will dent my averange length of credit histrory.

[Anonymous]

That factor is called your AAoA or Average Age of Accounts.  Do you happen to know what your AAoA is right now?  And also the total number of accounts you have?  (Include both your open and closed ones.)

If you know both of those, then it will be easy to show you the impact that adding a new account will have on your AAoA.

If you do not know both of those, then you need to learn how to find out.  It's important to know as you prepare for any important credit decision.

PS.  As a side note, be sure not to use Credit Karma as a tool for calculating AAoA.  Karma is great for lots of things, but not anything age related.  It gives very misleading information there.

[Anonymous]

My AAoA is 1 year 10 months. I have total 10 accounts. 6 of those are open and 2 closed credit cards alongside 2 closed personal loans. I never had auto loan or mortgage.

When I applied for my recently closed secured loan, I got a dent of 36 points in my FICO 8 and it took 4 months to recover. Thank you. 

[Anonymous]

What was the term of your last loan?  E.g. was it a 12-month loan?

The reason that your score took such a hit on the first loan is not chiefly your AAoA.  Rather it is almost certainly has to do with the fact that, in the first few months of the loan, you still owed most of the amount on it.

Read through the 2nd post on that thread again, the one called The Theory Behind The Technique.  The thing I am talking about is there called Installment Utilization.  You will see that the Technique as described in the guidance involves paying off most of the loan very early.

How many open credit cards do you have?  (I ask this because it is relevant to anyone preparing for a mortgage.)

If you can restrict yourself to only opening exactly one account (the Alliant SS loan -- no other loans, credit cards, etc.) and then you implement the Technique as described, you will be in great shape, much higher than you will be with no open installment loan (your score has not taken a dive yet but it will).

Your goal should be to add back a loan (using the steps described) and then give yourself enough time for your AAoA to go over 2.0, which should happen in about 4-5 months from now if you add the loan.  Just getting the loan will help a lot (compared to where you will be if you don't) but you will see an additional boost for having an AAoA that exceeds 2.0 when that happens.