Credit Score vs Interest paid. How to maximize score and minimize interest?

[Anonymous]

So, I took out 2 personal loans, a $6000 and a $5000 loan. Both for 4 years for me to buy my 2015 ford mustang in cash. That was the cost of my car. I love it. I do realize that the interest rates for personal loans are way higher than car loans, and I may end up paying a relatively high amount in interest over the 4 years. I checked my amortizided schedule to see how much interest i would pay. I realized too, that my average age of accounts dropped significantly as well, which I think is also a factor for my credit score. Is it average age of accounts or average age of active accounts?For example, If I close/pay off an installment account after 10 months, will the next months be included in the average or just the 10 months that were reported? It seems to me that anyone can open an installment account for X amount of years, but pay it off the following month and grow their average?That doesnt seem right.

Should I pay off 1 loan after a year? Should I try to lower them down to 30%? Should I just make the minimum payments? What is the best way to boost my fico score and pay the lowest amount in interest?

[Anonymous]

FICO's age-related factors are:

     * AAoA (Average Age of Accounts)

     * AoOA (Age of Oldest Account)

     * AoYA (Age of Youngest Account)

All three count closed accounts just as much as open ones.  Furthermore when an account is closed, it continues to age.

The best thing for you that will help you with both interest and credit score is to do the following:

       (1) Log on to each loan and see how exactly how much you owe on each now compared to how much the loan was originally for.  Be sure to locate the section that tells you the date that the next payment is due.  Be sure to write all this down.

       (2)  Confirm that both loans are on all three credit reports.

       (3)  When you have a big lump some of money, make a single payment on either or both of the loans.  It should be for at least $1000 and at least 5 payments.

       (4)  Then look to see what happens to the Due Date for the next payment.  What you are hoping is that it will get pushed way back in time -- by at least five payments.  If that happens, you are in good shape.  Pay the loans down to 8% and you'll get a big boost in your score.  Be sure to cancel any autopay feature since you want to keep the loan mostly paid off but still open for a long time.

       (5)  If one or both of the lenders do not push the due date back, circle back with us and we can strategize.

[Anonymous]

One of my loans does not push the due date according to the payment amount. 1 does. I just dont know whether the extra amount will all go towards the principle balance and push the due date, or distribute accordingly to principle and interest agreed. Basically, I would be making my minimum payments in advance and not save the interest.

[SouthJamaica]

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@Anonymous wrote:

So, I took out 2 personal loans, a $6000 and a $5000 loan. Both for 4 years for me to buy my 2015 ford mustang in cash. That was the cost of my car. I love it. I do realize that the interest rates for personal loans are way higher than car loans, and I may end up paying a relatively high amount in interest over the 4 years. I checked my amortizided schedule to see how much interest i would pay. I realized too, that my average age of accounts dropped significantly as well, which I think is also a factor for my credit score. Is it average age of accounts or average age of active accounts?For example, If I close/pay off an installment account after 10 months, will the next months be included in the average or just the 10 months that were reported? It seems to me that anyone can open an installment account for X amount of years, but pay it off the following month and grow their average?That doesnt seem right.

Should I pay off 1 loan after a year? Should I try to lower them down to 30%? Should I just make the minimum payments? What is the best way to boost my fico score and pay the lowest amount in interest?

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The best way to increase your scores with them is to keep them both open and pay them down to 9% of the original loan.

[Anonymous]

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@Anonymous wrote:

One of my loans does not push the due date according to the payment amount. 1 does. I just dont know whether the extra amount will all go towards the principle balance and push the due date, or distribute accordingly to principle and interest agreed. Basically, I would be making my minimum payments in advance and not save the interest.

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You can answer this (as I suggested) by making a big payment and seeing what happens.  There should be a field on the bank's online interface that tells you how much you owe -- i.e. the principle.  Pay $500 and see what happens.  I am almost sure you will see that the principle will decrease by $500 (less that month's interest, perhaps).

Once you have confirmed that this one loan is working the way you want, just pay both loans down to 8% and you'll be set.  You needed to be sure that at least one permitted prepayment before you did this, but once you have confirmed you should be good to go.  After both loans show with the much lower balances (on all three reports) you can choose to pay off the loan that does not permit prepayment -- or you can let it pay off over the next six months or so. 

As with any loan that you want to keep open for a long time (i.e. the one that does permit prepayment) you should make an additional payment of a couple bucks every six months, just to avoid any possible "inactivity" fees.

[Anonymous]

I would simply call the lender and ask them how they handle payments that are in excess of the required monthly payment... if it impacts the due date, etc.

[Anonymous]

Normally I'd agree with you, BBS.  If the OP were trying to decide to take out a given loan with a lender, that would be the way to go.  But in our OP's case he's already got the loans.  Customer Service Reps are notoriously ill informed about how their own products work, especially with respect to the issue of prepayment.  So to me it makes more sense in this case to pay the loan down a good stretch and look to see what happens.  That will give the OP a certain answer.

[Anonymous]

So. What I'm getting from you guys is that I should lower my principle to about 10% of my original loan. To minimize interest paid. But, would I reap the most Fico points that way? Paying my loan in1 or 2 years, compared to 3 to4. What are the benefits(to my score) of me not paying off my loans quicker and letting it mature till 4years. Compared to paying it off quicker, which I would if I would to bring the loans down to 10%

[Anonymous]

The actual breakpoint is 8.99%, not 10%.  And remember that interest continues to accrue, so 8% may be better than 8.99% from a practical perspective (you want to keep the balance at under 8.99%).

You will not get any scoring benefit from paying those loans slowly over time.  You will, however, pay more interest that way.  And you will not receive the maximum scoring benefit until substantially later as well, also a drawback.

With a loan like a mortgage there is some strong evidence that you can get the full scoring boost at a much higher % utilization, if you have a history of 25+ payments.

Finally, keep in mind that if you end up paying off all loans (so that you have no open loans at all) you will have a score drop.  What you are looking to do is have your loans mostly paid off and then keep them open for a long period of time.  With one of your loans that may not be doable but with the other it sounds like it is.