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How does a personal loan affect utilization?

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8bitmachinegun
Regular Contributor

How does a personal loan affect utilization?

I got an unsolicited offer from my credit union for a personal loan for a few thousand. The rate is substantially less than most of my credit cards, though it's close to the rate on my Navy Federal Platinum Card.


Right now my 'utilization' is getting close to percentage that will negatively impact my scores. If I use it to pay off some of my debt, will the extra $5000 simple be added to my overall 'available credit' or will it free up $5k of my existing credit, and be tracked separate from my CC debt?

FICO8 - Aug 2020
FICO9 - Aug 2019
Message 1 of 10
9 REPLIES 9
Slabenstein
Valued Contributor

Re: How does a personal loan affect utilization?

Revolving utilization and installment balance-to-loan ratio are separate metrics, so personal loan balances do not count as part of utilization.  Score improvement is one of the benefits of debt consolidation loans that fin serv sales ppl often tout, and for score 8 & 9 they do usually help b/c revolving util is weighted much more heavily than installment b:l on those versions.  That the rates on personal loans usually beat credit card interest is also a finances > FICOs benefit.


Message 2 of 10
SouthJamaica
Mega Contributor

Re: How does a personal loan affect utilization?


@8bitmachinegun wrote:

I got an unsolicited offer from my credit union for a personal loan for a few thousand. The rate is substantially less than most of my credit cards, though it's close to the rate on my Navy Federal Platinum Card.


Right now my 'utilization' is getting close to percentage that will negatively impact my scores. If I use it to pay off some of my debt, will the extra $5000 simple be added to my overall 'available credit' or will it free up $5k of my existing credit, and be tracked separate from my CC debt?


1. Installment utilization and revolving utilization are 2 completely separate metrics.

 

2. No it will not be added to your available credit.

 

3. If you take out a loan you will be resetting your age of newest account, lowering your average age of accounts, and adding at least one hard pull.  So it's inadvisable to take out such a small loan.  My advice: don't.


Total revolving limits 741200 (620700 reporting) FICO 8: EQ 701 TU 704 EX 685

Message 3 of 10
Slabenstein
Valued Contributor

Re: How does a personal loan affect utilization?


@SouthJamaica wrote:

3. If you take out a loan you will be resetting your age of newest account, lowering your average age of accounts, and adding at least one hard pull.  So it's inadvisable to take out such a small loan.  My advice: don't.


That's a very good point.  Since we're talking about moving revolving debt to a new installment to avoid crossing a single util threshold, as opposed to using consolidation to cross many/all of them, OP might not come out ahead, FICO-wise.


Message 4 of 10
8bitmachinegun
Regular Contributor

Re: How does a personal loan affect utilization?


Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

 

FICO8 - Aug 2020
FICO9 - Aug 2019
Message 5 of 10
Slabenstein
Valued Contributor

Re: How does a personal loan affect utilization?


@8bitmachinegun wrote:

Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

 


How old is your oldest account, and how many reporting tradelines do you have?  I think young and thin files usually see a greater impact from new inquiries and accounts.  Bringing util down by about 10% might put your across one util threshold, depending on where you are at, so probably it wouldn't offset the impacts from opening a new account.  Ofc, if you want to save some money on interest or lower your monthly payments by moving the debt over to a personal loan, those are real reasons to do so regardless of the potential FICO impacts.  You could also look at moving all of your revolving debt over to an installment with a debt consolidation loan, tho that comes with its own kind of risk if you don't use it correctly.


Message 6 of 10
Anonymous
Not applicable

Re: How does a personal loan affect utilization?


@8bitmachinegun wrote:

Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

 


Finances over FICOs - always prioritize what makes more financial sense rather than what is going to maintain or improve a score.

 

A 10% change in utilization is not likely to change your scores much, unless you are going over 89% utilization. If the interest rate on the loan is going to be lower than on your CCs then go for it, although it would be preferable to take a loan large enough to pay off all of your cards and keep those cards paid off using whatever strategy works best for you.

Message 7 of 10
SouthJamaica
Mega Contributor

Re: How does a personal loan affect utilization?


@8bitmachinegun wrote:

Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

 


IMHO it would make a dodgy situation worse.


Total revolving limits 741200 (620700 reporting) FICO 8: EQ 701 TU 704 EX 685

Message 8 of 10
Shooting-For-800
Senior Contributor

Re: How does a personal loan affect utilization?

I would just open another card with a balance transfer.

I just got SunTrust with a promo at prime (under 4%) for 3 years.

GL!

Rebuild started in 2014  -  $100k unsecured credit in 2017  -  $500k unsecured credit in 2024.

DON'T WORK FOR CREDIT CARDS ... MAKE CREDIT CARDS WORK FOR YOU!



Message 9 of 10
Anonymous
Not applicable

Re: How does a personal loan affect utilization?


@8bitmachinegun wrote:

Well I'm already going to take out one loan to refinance or replace my car. And while $5k may not sound like much, it would still bring my utilization down by a little over 10%. My credit is pretty young as it is. Does that mean another new account won't have much impact, or would it just make a dodgy situation worse?

 


It depends on when you opened your last account, what is your AoYA/AoYRA?

 

But you are correct that second or subsequent new accounts have less impact than the first, and can potentially have none, depending on whether, vel non, thresholds are crossed. 

Message 10 of 10
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