Auto Installment Loans

[roxy72]

Hi Everyone,

I've had an auto loan through Wells Fargo Dealer Services since May 2012 which was just paid off by another dealer who I traded my car in to.  My new auto loan hit my credit (no jump in score) prior to the balance of the previous auto loan reporting as 0.  So why is it that my EQ score dropped 18 points when previous loan reported as 0?  I've been working really hard on building my credit for over a year now and to seen a drop in score like that nearly gave me a heart attack.  What can I do to bring it back up into the 700s?  My EQ score is the only one that is so hard to budge.

[Anonymous]

Short answer:

Before the trade-in, you had most of your current open loan paid off.  Now when FICO looks at your current open loans, it sees that you owe almost the entire amount.  FICO likes it best when you have open installment debt that is mostly but not entirely paid off.

As you pay down your car loan you will begin to get those scoring points back.

Longer answer:

The scoring factor I allude to above is often called "installment utilization."  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.

[roxy72]

Ok, I get it.  Thank you for clarifying things

[RobertEG]

Additionally, once the new loan reports, it adds an account with zero age into your avg age of accounts calculation.

Finally, if the new loan also reported a hard inquiry, it will temporarily affect scoring for up to a year.