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FICO scoring on installment loans is anal

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DaveInAZ
Senior Contributor

FICO scoring on installment loans is anal

If you don't have an installment loan reporting you're penalized for that in your credit mix. Get an installment loan, and you are penalized for the loan balance being "too high" until you get the balance down to less than 10% (or is it 9%?).

 

Say you take out a 60 month car loan. Assume your monthly payments all equally lower your principal. Yeah, they don't because more  of your payment goes toward interest in the beginning and more toward principal at the end. But for simple math's sake let's say they all equally lower your principal.

 

So, for the first 54 of responsible monthly payments FICO gives you a "You naughty boy! Loan balance is too high!"

Then you get a whole 6 months of "Atta boy!, loan balance is acceptable to us."

Then you make the last payment paying it off, and you start getting a "Tsk, tsk! No recent installment loans!"

 

Right now, I'm getting both #1 & #2 of above. In Feb, 2015 I took out a car loan at a small local credit union at a great rate. It's almost half paid off, $5500 balance on a $10k loan. But they only report to EX & EQ. So on EX & EQ FICOs I get "Loan balance is too high!!!!", while on TU I get "Tsk, tsk! No recent installment loans!"

 

Yeah, nothing can be done about TU until I get an installment loan that reports to it. I have app'd for a Home Equity Line of Credit with Penfed, but since it's a LOC and not a fixed loan amount I don't think it count as installment, although it should report as a real estate loan which should help the account mix. I just do what's best for me financially, and while my FICO scores are important, I don't let that dictate my financial decisions.

 

But in my opinion FICO considering an installment loan balance being "too high" is ridiculous. I think a 50% loan balance would be reasonable, you've made around half the payments in a responsible, timely manner. Yeah, I/we aren't going to get FICO to change its scoring algorithms, just a rant & I'll be curious about the comments.

Message 1 of 47
46 REPLIES 46
Glen_M
Frequent Contributor

Re: FICO scoring on installment loans is anal

It's a math formula created by a bunch of accountants and statisticians, not an amusement park ride.  

 

It doesn't need to "make sense", just make money.



Message 2 of 47
Anonymous
Not applicable

Re: FICO scoring on installment loans is anal

That's why the Alliant SSL "hack" is so popular even with people who have high FICO scores.

 

I'm basically screwed on that note without the hack.  I own my home mortgage-free and I use private car services so I never will own a car again.  Don't need a loan for anything so I just will keep the SSL going and renew a new one once that one expires.

 

As for your interpretation that 50% utilization is still "too high", don't forget that FICO spends millions (hundreds of millions over decades) analyzing real people and risk factors and their math holds up very well for investors in debt.  50% left on a loan still puts someone in a category where they may be a credit risk later -- if you lose your job, get sick, etc, you can't just PIF that loan most of the time like one at 9%.  50% may not even cover the current market value of the asset if you bought in a bubble.

Message 3 of 47
Anonymous
Not applicable

Re: FICO scoring on installment loans is anal

Hi Dave!  A few quick thoughts:

(1)  Part of your concern is purely practical.  That is, you want to make sure that you are getting the full scoring benefit for your TU score (since you have no open installment loan on the TU report).

Happily that is easy to solve.  Just take out a Share Secure loan with Alliant, pay almost all of it off, and keep it open for five years.  The first three posts in this thread will tell you all you need to know about that:

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

(2)  You may be under the impression that you get no scoring benefit unless your installment utilization is < 9%.  This is not so.  You almost certainly get some benefit far earlier than that.

Furthermore, contributor Thomas Thumb speculates that the thresholds for benefit may be quite a bit higher if a person has been making payments on a loan in good standing for a while.  What constitutes a "while" is uncertain, but I think TT doubts it is longer than 24 months.

(3)  Remember that there isn't a single way that FICO handles installment utilization (how much of one's open debt has been paid off).  FICO 8 cares about that.  The mortgage model for TU and EQ (FICO 04) does not care at all.   The mortgage model for EX (FICO 98) cares but perhaps not as much as FICO 8.  And I don't think we have much hard evidence for exactly how much FICO 9 cares, though I have been trying to get people on the SS loan thread to provide that.

Future FICO models may very well track and reward the successful management and gradual payoff of loans that are 24+ months in length.  Certainly someone with a history of five such loans (say) on his report (but no open debt) deserves more scoring benefit than someone with no such history but who is exploiting the SS loan trick.

But until the models arrive that you'd like, the good news is that you can certainly take practicial steps to prevent yourself from being penalized by the successful payoff of your open debt.  Just make sure you have implemented the SS loan technique and you will be set.

(4)  You write:  "I just do what's bestfor me financially, and while my FICO scores are important, I don't let that dictate my financial decisions."  Good for you!  Great way to think.

Message 4 of 47
Anonymous
Not applicable

Re: FICO scoring on installment loans is anal

I had only 3 CCs and too out a personal loan and lost between 45-58 points on all FICO 28 scores. Most of them dropped me from the 700s. So I'm guessing as he's guessing. On 60 month loan I'm also going to be punished for a long time too
Message 5 of 47
Gunnar419
Valued Contributor

Re: FICO scoring on installment loans is anal

The Alliant Share Secure loan is definitely a good credit hack, but why should it be necessary?

 

FICO's scoring regarding installment loans may be the most irrational part of credit scoring. I can see the point of wanting an installment loan to be present in the credit mix, but not the point of slaughtering otherwise good scores the instant the installment loan gets paid off. If closed and paid credit cards count on our credit for up to 10 years, why should an installment loan ding us, and badly, the month after it's paid off?

Message 6 of 47
Anonymous
Not applicable

Re: FICO scoring on installment loans is anal


@Gunnar419 wrote:

If closed and paid credit cards count on our credit for up to 10 years, why should an installment loan ding us, and badly, the month after it's paid off?


When has FICO been for the consumer?  It isn't.  It's for banks.  FICO is a great way for banks to commoditize debt by risk factor with the explicit desire to make a profit.

 

Someone who doesn't carry a loan right now has no CURRENT report of how well they can manage it.  How you managed credit in the past well has no reflection on your profitability for banks today.  Even if your history up to last month was perfect payment, it still doesn't reflect how profitable you will be for a lender today.

 

Carrying a loan at the moment and showing the ability to manage a broad mix of credit tells banks you're a low risk, but you MIGHT be a profitable consumer.

 

FICO is not for consumers, it's for lenders.

Message 7 of 47
Anonymous
Not applicable

Re: FICO scoring on installment loans is anal


@Gunnar419 wrote:

The Alliant Share Secure loan is definitely a good credit hack, but why should it be necessary?

 

FICO's scoring regarding installment loans may be the most irrational part of credit scoring. I can see the point of wanting an installment loan to be present in the credit mix, but not the point of slaughtering otherwise good scores the instant the installment loan gets paid off. If closed and paid credit cards count on our credit for up to 10 years, why should an installment loan ding us, and badly, the month after it's paid off?


I'm not sure that's the best parallel to draw.  Like closed and paid credit cards, closed and paid loans remain on one's credit reports for (typically) ten years. 

 

And you would find that if all of your revolving accounts became closed, you would also experience a substantial scoring penalty.  Even if only one revolving account among two or three becomes closed, that can cause you to take a score drop, in a manner analgous to the (possible) score loss that can occur with one loan amongst two or three open loans becoming closed.  (The closure can affect "utilization.")

 

So far from open installment accounts being treated much differently than open revolving accounts, FICO 8 treats them in a similar way.  With both, there is a "utilization" factor that applies only to open accounts.  With both, there's a big penalty when all accounts of a single type becomes closed.

 

A better line of thinking, to my mind, would be one that argues that closed installment loans should be scored very differently from closed revolving accounts.  I.e. that FICO should look at a closed loan that lasted for 24+ months with the borrower never missing a payment and should give him some scoring points for that, especially if he has more than one such closed loan.  FICO does not do that especially for closed credit cards but (it could be argued) FICO should do that for closed installment loans.  And it may well be that FICO is planning that for future models.

 

So as I mentioned in my first response, I sympathize with the OP and agree that he may be right that better models would consider closed loans as a scoring asset.  But the way to get there is not to argue that closed revolvers and installment loans should be treated in a very similar way.  They are -- which is likely the problem you are sensing.

Message 8 of 47
DaveInAZ
Senior Contributor

Re: FICO scoring on installment loans is anal


@Anonymous wrote:

Hi Dave!  A few quick thoughts:

(1)  Part of your concern is purely practical.  That is, you want to make sure that you are getting the full scoring benefit for your TU score (since you have no open installment loan on the TU report).

Happily that is easy to solve.  Just take out a Share Secure loan with Alliant, pay almost all of it off, and keep it open for five years.  The first three posts in this thread will tell you all you need to know about that:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secure-technique/m-p/4506756

(2)  You may be under the impression that you get no scoring benefit unless your installment utilization is < 9%.  This is not so.  You almost certainly get some benefit far earlier than that.

Furthermore, contributor Thomas Thumb speculates that the thresholds for benefit may be quite a bit higher if a person has been making payments on a loan in good standing for a while.  What constitutes a "while" is uncertain, but I think TT doubts it is longer than 24 months.

(3)  Remember that there isn't a single way that FICO handles installment utilization (how much of one's open debt has been paid off).  FICO 8 cares about that.  The mortgage model for TU and EQ (FICO 04) does not care at all.   The mortgage model for EX (FICO 98) cares but perhaps not as much as FICO 8.  And I don't think we have much hard evidence for exactly how much FICO 9 cares, though I have been trying to get people on the SS loan thread to provide that.

Future FICO models may very well track and reward the successful management and gradual payoff of loans that are 24+ months in length.  Certainly someone with a history of five such loans (say) on his report (but no open debt) deserves more scoring benefit than someone with no such history but who is exploiting the SS loan trick.

But until the models arrive that you'd like, the good news is that you can certainly take practicial steps to prevent yourself from being penalized by the successful payoff of your open debt.  Just make sure you have implemented the SS loan technique and you will be set.

(4)  You write:  "I just do what's bestfor me financially, and while my FICO scores are important, I don't let that dictate my financial decisions."  Good for you!  Great way to think.


Hi CreditGuyInDixie - Your thread on the Share Secure loan with Alliant is excellent,kudos!, and I've read much of it. Right now my FICO scores across the 3 CRAs are in flux, as the accounts included in my 2010 BK7 are falliing off. I got TU to early exclude all of them, and it jumped from 677 to 720 FICO. I got EX & EQ to exclude all but my not reaffirmed mortgage, but they're still mired at 678/685 EX/EQ, and they're the ones reporting my car loan (and at 1.99% APR I'm not paying it down to under 10% just to make FICO happy!).

So I'm not sold on the necessity of a secured loan for TU, but once things are all equal with BK accounts gone if I think it's worthwhile my local CU where I have accounts offers secured loans so I'd go with them. But your instructions on paying it down to under 10% and making minimal payments for as long as possible is an excellent guideline.

Message 9 of 47
Anonymous
Not applicable

Re: FICO scoring on installment loans is anal


@Anonymous wrote:

@Gunnar419 wrote:

If closed and paid credit cards count on our credit for up to 10 years, why should an installment loan ding us, and badly, the month after it's paid off?


When has FICO been for the consumer?  It isn't.  It's for banks.  FICO is a great way for banks to commoditize debt by risk factor with the explicit desire to make a profit.

 

Someone who doesn't carry a loan right now has no CURRENT report of how well they can manage it.  How you managed credit in the past well has no reflection on your profitability for banks today.  Even if your history up to last month was perfect payment, it still doesn't reflect how profitable you will be for a lender today.

 

Carrying a loan at the moment and showing the ability to manage a broad mix of credit tells banks you're a low risk, but you MIGHT be a profitable consumer.

 

FICO is not for consumers, it's for lenders.


Hi ABCD!  That sound plausible, but I am pretty sure it is not so.  (Though again, I can totally see why you'd think it might be.)

 

FICO has been repeatedly clear that the big scoring models we are all familar with (Classic, Auto Enhanced, and even Bankcard Enhanced) produce a number that measures one thing: the likelihood that a consumer will become severly delinquent on one or more accounts in the next X months.  The exact value for X might vary for the model: maybe it is 18 months for one model or 24 months for another.  And "severely delinquent" might have a slightly different definition.  (Though I wouldn't be surprised if it had a consistent meaning of "90 days.")

 

But FICO's published white papers are clear that this and only this is what the score measures.

 

And aside from what the white papers say, we can see this is empirically by looking at people who are extremely unprofitable for CC issuers (indeed they make the CC companies negative profit) but who score extremely high (800s) on FICO 8 Classic and FICO 8 Bankcard Enhanced.  Indeed I am pretty sure that, for every point a person's score exceeds 780, that is correlated with an increasing probability that he will make the CC issuer less money (or even make the issuer negative money).  It's possible for a person to have a score in the 840s and yet make the issuer a good deal of money, but that is very rare.

 

If the score was partly measuring profitability, this could not happen.

 

But where I think you are likely on target is that FICO may well be making other kinds of highly specialized data mining tools that assist a CCC (for example) in identifying lucrative customers.  It's just that the main scoring model does not do that, save through the method of enabling the CCC to assess risk of default (something that certainly eats into profitability).

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