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Will a past, paid off, good standing loan, still help my credit?

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Will a past, paid off, good standing loan, still help my credit?

I'm in the process of getting a personal unsecured loan, for the purpose of diversifying my types of credit, to boost my credit score(my ultimate goal is 800+), since I already have a well established credit history with credit cards, and the number 2 reason that was reported to adversy affect my credit score was "lack of recent installment information". Now I'm applying for a 2 year loan. But when the 2 years is up, will it still keep on helping my credit, or is it that only a current, active loan counts as "recent installment information"? If it doesn't help anymore, doesn't that mean I have to keep on applying for loans, or at least get a long term loan?

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Super Contributor

Re: Will a past, paid off, good standing loan, still help my credit?

Have you applied for this loan yet? 

 

If not, the folks here would advise against the unsecured loan you are considering.  Instead we would recommend a Share Secured loan with Alliant.  You will get more FICO scoring benefits with it than with the unsecured vehicle, it will lost you far less in interest, it will last longer (5 years) and finally there is no hard inquiry,

 

This link will give you everything you need to know.  You just need to read the first few posts in the thread:

 

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

Message 2 of 9
New Visitor

Re: Will a past, paid off, good standing loan, still help my credit?

Thanks for the information. I've looked through it. Actually I've actually applied for the loan I mentioned, don't know if it'll be approved. It not I'll look into other options.
Message 3 of 9
Super Contributor

Re: Will a past, paid off, good standing loan, still help my credit?

Even if it does get approved, you may want to circle back with us to discuss the Alliant SS loan.  Your options will be:

 

(1) Stick with your two year unsecured loan.  Because it won't get paid down early on, the scoring benefit will be low at first and the interest cost comparatively high.  It will also last only two years and then at that point you will lose most of the scoring benefit.

 

(2)  Add a 5-year Alliant SS loan, and pay it down to < 9% as per the guidance. Then pay down your unsecure loan (or just pay it off).  Your scoring benefit will be higher than scenario #1, and it will be cheaper and will last a lot longer.

 

Many people discover that they have a car loan or a mortgage by the time that their first 5-year SS loan is finished, in which case there's no advantage to getting another SS loan.  If you find yourself still without any other installment loan at the end of the five years, it is easy to add another 5 year loan at that time.

Message 4 of 9
Super Contributor

Re: Will a past, paid off, good standing loan, still help my credit?

OP, to answer your original question of whether or not the paid off loan 2 years from now will "help your credit" it sort of depends on your definition that phrase.  In terms of scoring, no, it won't help your score.  In fact, when the 2 year loan is paid off your score will probably drop some 20-25 points if it is your only installment loan.  1.5-1.9 years from the time you open the loan though you'll be receiving maximum scoring benefit, but once the loan reports as closed if you don't have any other open installment loans your scores will take a hit.

 

On the other hand, it will "help your credit" in that from a manual review someone will be able to see that you've got a paid off / paid as agreed loan on your credit report which is a good "look" - while this won't help your scores, it's a positive installment account on your profile that someone such as a mortgage lender would see and look favorably upon if you were to apply for a mortgage through them.

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New Visitor

Re: Will a past, paid off, good standing loan, still help my credit?

I could definitely try to apply for the SS loan, even if my other loan is approved. However if applying for another loan right away, wouldn't that lower my chance of getting approved? Llike applying for two credit cards one right after the other?

Message 6 of 9
Super Contributor

Re: Will a past, paid off, good standing loan, still help my credit?

Let's figure this out together.

 

The first thing that occurs to me is that you may not be at a place yet where you have to add this 2-year loan.  It sounds like you applied a few days ago, and therefore you probably can't get around the hard inquiry.  But it's quite possible that the next step would be for a loan officer to contact you -- and only after finalizing some additional paperwork would the account be created.

 

It's also possible that you could reach out the loan dept and tell them that you are rethinking whether this loan product may be right for you right at this time, and would they be willing to cancel the application?  And if so can they confirm that (aside from the possible inquiry) no new account would be reported to the credit bureaus?

 

If so, then you'll be in good shape to go with the Alliant approach.  You can look at it as getting the exact same product as is described in the guidance, except that you incurred a hard inquiry in this whole process (from the other lender, not Alliant).

 

Read through the guidance again, and see whether this seems like the product you want.  It lasts five years and you will get about a 30 point bonus within 60 days (some people get a bit more or less).  The other loan would have taken about 20 months or so to fully obtain the same boost, and then the boost would have gone away 4 months after that.  With the Alliant approach you'll have that scoring benefit for the full five years.  Finally, you will pay almost no interest with the Alliant approach.

Message 7 of 9
Super Contributor

Re: Will a past, paid off, good standing loan, still help my credit?

I strongly agree that the above post is the way to go in this situation.

Message 8 of 9
Super Contributor

Re: Will a past, paid off, good standing loan, still help my credit?


@jb007bsa wrote:

I'm in the process of getting a personal unsecured loan, for the purpose of diversifying my types of credit, to boost my credit score(my ultimate goal is 800+), since I already have a well established credit history with credit cards, and the number 2 reason that was reported to adversy affect my credit score was "lack of recent installment information". Now I'm applying for a 2 year loan. But when the 2 years is up, will it still keep on helping my credit, or is it that only a current, active loan counts as "recent installment information"? If it doesn't help anymore, doesn't that mean I have to keep on applying for loans, or at least get a long term loan?


Your FICO 8 score gets optimized when your total installment loan utilization on open loans is more than zero but less than 10 percent. So, when you first take out a loan, and your utilization is 100%, you lose points, and when you pay off the only loan you have down to zero, you lose points there too.

 

So as far as FICO 8 is concerned, you really have no permanent gain from taking out the loan, but the potential for some temporary gain.

 

The mortgage scoring models, I am told, behave differently, and do not favor an open loan over a paid off loan like FICO 8 does, but I have not been able to monitor those sufficiently to form an opinion on that.


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