How long does it take for FICO scores to bounce bank after paying of installment loan

[practical1]

I have been slowly but steadily racheting-up my FICO scores.  My file is only <6 years in depth (average age around 3 years) with about a dozen revolving cards and lines, several paid installment loans and had only one active installment loan (no auto, mortgage or student loans).  Utilization is never more than 1 - 3 % -- I pay each obligation at several times a month, leaving a few dollars on several cards simply to allow the scoring models to work -- when I pay everything down to 0. my score drops.

My FICO-8 was hovering in the 680 - 686 range before I opened a $5K, 5 year installment loan last June.  Upon opening it, my score dropped about 20 points, due to the combined effects of the hard pull, new account and high outstanding balance relative to entire loan amount.

So, I did some experiments.  I started paying larger and larger amounts on the credit line.  Once I exceeded 50% paid, FICO-8 increased significantly.  Once over 95% paid off, my score peaked at 743 -- a nice improvement, which I accomplished after about 10 months.

However, that left me with a very small balance, which had to be covered in full with the next month's payment.  As soon as that payment was processed (and the loan reported closed), my score dropped 36 points.  Seems outrageous that the stupid algorithm penalizes pre-payment of loans (which should be considered a positive indicator).

So, I just opened one of those credit builder accounts (which does not require a HP) and immediatly paid-down a bit more than 50% of the balance.  Of course, this account reports as "new" and I was dinged again another 6 points.   

I'm hoping that as this account matures on the record, it will have a compensating effect within a very few months -- my questions (to this community of much moreknowledgeble folks):   Is this a good strategy?  When might I expect to see beneficial results?  Should I consider opening another one or two of these kinds of installment loans to round-out the data for scoring?  Is there anything else you reccomend I do to improve the FICO?

I would appreciate any constructive ideas, thoughts or explanations.

Thanks.

[SouthJamaica]

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@practical1 wrote:

I have been slowly but steadily racheting-up my FICO scores.  My file is only <6 years in depth (average age around 3 years) with about a dozen revolving cards and lines, several paid installment loans and had only one active installment loan (no auto, mortgage or student loans).  Utilization is never more than 1 - 3 % -- I pay each obligation at several times a month, leaving a few dollars on several cards simply to allow the scoring models to work -- when I pay everything down to 0. my score drops.

My FICO-8 was hovering in the 680 - 686 range before I opened a $5K, 5 year installment loan last June.  Upon opening it, my score dropped about 20 points, due to the combined effects of the hard pull, new account and high outstanding balance relative to entire loan amount.

So, I did some experiments.  I started paying larger and larger amounts on the credit line.  Once I exceeded 50% paid, FICO-8 increased significantly.  Once over 95% paid off, my score peaked at 743 -- a nice improvement, which I accomplished after about 10 months.

However, that left me with a very small balance, which had to be covered in full with the next month's payment.  As soon as that payment was processed (and the loan reported closed), my score dropped 36 points.  Seems outrageous that the stupid algorithm penalizes pre-payment of loans (which should be considered a positive indicator).

So, I just opened one of those credit builder accounts (which does not require a HP) and immediatly paid-down a bit more than 50% of the balance.  Of course, this account reports as "new" and I was dinged again another 6 points.   

I'm hoping that as this account matures on the record, it will have a compensating effect within a very few months -- my questions (to this community of much moreknowledgeble folks):   Is this a good strategy?  When might I expect to see beneficial results?  Should I consider opening another one or two of these kinds of installment loans to round-out the data for scoring?  Is there anything else you reccomend I do to improve the FICO?

I would appreciate any constructive ideas, thoughts or explanations.

Thanks.

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Your experience with paying down your only installment loan was different than mine.  I never saw any real point gain until I had the loan down to 9%.

IMHO the only kind of loan worth getting for this purpose is a share secured loan from NFCU. If you get a  60 month loan (must be greater than $3000), and pay it down to 9%, you can reap the score benefit for 5 years.

[Anonymous]

Alliant, USBank, and Penfed offer unsecured personal loans that you can prepay while advancing the due date to keep them alive.

NFCU offers a secured loan that you can do the same with.

It's called the share secure loan trick and there's plenty of info around here on it.

I'd suggest doing one of those instead and prepaying it to get the boost, if you add more of these short ones you'll hammer down your AAoA and get new account penalties.

[practical1]

Thanks for that insight.  If I read your message correctly, I should take at least a 3K, 5 year loan, pay 2750 right away, leaving $250 balance.  How can I stretch the payments over the necessary timeframe?  Does that credit union adjust the amortization schedule on remaining balance-- mine didn't, so the minimum payments remained constant and I lost the benefit of the additional 4 years as the loan closed automatically.

[Anonymous]

@practical1 You need to read the scoring primer and the thread on the share secure loan technique.

First off you weren’t penalized when you’re closed your loan. The algorithm gives you bonus points for having a loan under certain threshold. You were rewarded for having a loan almost paid off.

one threshold is believed to be around 65% and the other is believed to be at 9%. The first is worth about a 1/3 of the boost of the other one 2/3 at 9%.

So you didn’t lose anything for paying off your loan, they just took back what they gave you for having a almost paid off loan.

On the other hand, every time you open one up, you lower your average ages of accounts and average ages of installment accounts and do more lasting damage to your score.

If you would simply get one five-year SSL or PL and pay it down and then make auto payments of 2 to 5 dollars a month whatever is required to pay it off at the full five-year term, and stop opening new accounts your ages will increase and you will see your scores also increase.

[Anonymous]

@practical1 And by the way, there is no new account penalty for opening a loan. The points you lose are from the hard inquiry and then from the hit to your average age of accounts and your average age of installment accounts when it reports.

And if you already have loans open, it could be due to increasing your aggregate installment utilization.

by the way what is the age of your youngest revolving account? If you let it age to 12 months, you'll get 10 to 15 points probably

[practical1]

Appreciate your input.  I hadn't looked at the problem from that perspective.

My youngest revolving line or credit card is around 16 months old and I haven't appied for anything in more than a year.  One recent (<1 year) hard pull, 3 older ones which have not dropped-off the EX or TU credit reports.  No HP showing on EQ.

Has anyone as yet foound another bank for which the "Shared Secured" loan trick -- or even a regular loan -- can be pre-paid up to 91% and stay alive for the balance of a 5-year term?

Unfortunately, I cannot qualify for a Navy CU account and would most certainly appreciate another option.

Thanks. 

[SouthJamaica]

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@practical1 wrote:

Appreciate your input.  I hadn't looked at the problem from that perspective.

My youngest revolving line or credit card is around 16 months old and I haven't appied for anything in more than a year.  One recent (<1 year) hard pull, 3 older ones which have not dropped-off the EX or TU credit reports.  No HP showing on EQ.

Has anyone as yet foound another bank for which the "Shared Secured" loan trick -- or even a regular loan -- can be pre-paid up to 91% and stay alive for the balance of a 5-year term?

Unfortunately, I cannot qualify for a Navy CU account and would most certainly appreciate another option.

Thanks. 

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A regular loan at Alliant Credit Union can be prepaid and stay alive for the balance of the loan.

I am told this is also true for PenFed, but I have no personal experience with that.

[Anonymous]

@practical1 And us bank and some other CUs, I believe, Ideal CU?

SCFCU?? Help @Anonymous 

[Anonymous]

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@Anonymous wrote:

@practical1 And us bank and some other CUs, I believe, Ideal CU?

SCFCU?? Help @Anonymous 

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I only know of NFCU and SSFCU for the secured loan. There was a list of other places around here somewhere but it got lost in the shuffle. 

US Bank does apparently work, my brief search says that PenFed does not. Alliant works for their regular loans but their UW can be a real joy to deal with. /s