Installment loan buyout on credit card - overthinking?

[Anonymous]

I have a 4.5% installment loan with about 2.5 years and $6,400 remaining. I always use my credit card to make the payments on this account each month because:

1. Costco visa rewards
2. No credit card transaction fee from the lender
3. Credit card balance paid in full every month

When Costco made the switch from Amex to Visa, I got an Amex Blue Cash Everyday because I wanted to continue my relationship with Amex. Aside from that, I haven’t been in the market for a new credit card in about a decade because I always had what Costco gives me. I guess you can say I’m pretty ignorant to what else is out there these days. But I recently realized that CIti has a 0% financing offer for a period of 21 months when you open a new SImplicity account with them.

That piqued my interest when I realized that I could get one of those 0% Citi cards, use it to pay off the entire installment loan, make payments to the credit card company instead, and save money in the process because the lender will not penalize me for paying the loan early or for using a credit card to do so. To the Credit Score Gurus out there I have the following questions:

1. How will carrying a balance of that size on a revolving credit account impact my credit score?
2. How will essentially closing that installment account impact my credit score?
3. Impact on credit score of doing both simultaneously?

Of course, 21 months vs 2.5 years would mean the payment would go up slightly, and that is fine.

I ask these questions because I’m looking to buy a house in the next year or so and the answers will help me assess if it’s worth the trouble. In case this helps, here are all my stats that I can think of:

• $65,700 annual salary
• $6,400 installment loan remaining
• $1,600 student loan remaining
• $40,000 Amex credit limit ($0 balance)
• $28,000 Costco Visa credit limit ($0 balance)
• $10,000 line of credit from bank ($0 balance)
• 817 Fico Experian credit score per Amex
• 782 Fico Equifax credit score per Costco Visa

[HeavenOhio]

Three more stats that would be useful to know if we're going to try to guess what might happen to your score:

1. The original amount of the loan you're thinking of paying off.
2. The original amount of your student loan.
3. The limit on your new Citi card.

Of course, you can't provide item 3. Not knowing the new card's limit is always the crapshoot when one wants to transfer a balance to a new card. But given your profile, I think you'll be fine for getting more than enough limit to absorb $6,400.

The more general answer is that FICO penalizes credit card utilization much more than installment utilization (the amount of your current loan balances compared to your original loan amounts). But your current limits are high, and your new card will likely have a high enough limit that it may not matter much.

If this were your only installment loan, you'd be taking a hit for not having any open loans on your reports. But with the student loan remaining, that's not the case. Interestingly, you have all of your cards with zero balances right now. FICO dings you for that; it likes to see one card reporting a small positive balance. Given all that, a $6,400 balance may actually increase the revolving portion of your score, which totally goes against the general wisdom.

[Gmood1]

Doesn't sound like a bad idea to me. What's going to happen is Citi will approve you for that simplicity. What you'll have to do is roll some or most of your CL from the Costco over, in order to keep your utilization looking pretty on the simplicity. If you initiate the transfer during the application. They may prompt you to call them. The UW will ask you how much you want to move over.  A $35k limit would put you around 18% utilization on that one CC.

[Anonymous]

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@Anonymous wrote:

I have a 4.5% installment loan with about 2.5 years and $6,400 remaining. I always use my credit card to make the payments on this account each month because:

1. Costco visa rewards
2. No credit card transaction fee from the lender
3. Credit card balance paid in full every month

When Costco made the switch from Amex to Visa, I got an Amex Blue Cash Everyday because I wanted to continue my relationship with Amex. Aside from that, I haven’t been in the market for a new credit card in about a decade because I always had what Costco gives me. I guess you can say I’m pretty ignorant to what else is out there these days. But I recently realized that CIti has a 0% financing offer for a period of 21 months when you open a new SImplicity account with them.

That piqued my interest when I realized that I could get one of those 0% Citi cards, use it to pay off the entire installment loan, make payments to the credit card company instead, and save money in the process because the lender will not penalize me for paying the loan early or for using a credit card to do so. To the Credit Score Gurus out there I have the following questions:

1. How will carrying a balance of that size on a revolving credit account impact my credit score?
   Really depends on how large of a credit limit Citi gives you. From your current credit cards, it looks like you could get a limit in the $10K-40K range. Ideally, you would have below 30%, but for sure do not consume any more than 60% or you will take MAJOR score hits as you near "maxing out the card" (maxing out the card isn't necessarily using 100% of the card's limit). However, as long as you pay down the debt below 60% before you apply for a mortgage, that should help (though ideally you want it lower)
   
   As an example, if you receive a $20K credit line, charge all $6400 to it. If you receive a $10K limit, either charge $6000 to it, or charge $6400 and know your score will take a ~15-30pt hit from utilization until its paid down lower.
   
   
2. How will essentially closing that installment account impact my credit score?
   It won't hurt your score that significantly, as it will still report for several years to come, just as a closed account. Better than having no reporting installment loan. I forgot about your student loan account. That will still report as open, so great!
   
   
3. Impact on credit score of doing both simultaneously?
   Really depends on how much the original loan was for. If the loan was for $10K, your score will possibly go up, as that is high remaining balance percentage  (64%) on the loan disappearing to 0% balance. If it was for $20K originally (34%), your score might stay the same. Really, I don't think closing the loan will be a very significant factor compared to 1) opening a new account (lower AAoA) 2) Taking a HP and 3) potentially using high utilization on said new card. However, given 1 year, both the HP and the new account become meaningless factors, and it really comes down to the utilization.
   

Honestly, I think you're going to get a large limit (or can call Recon/reallocate limits), and moving the balance will work out fine. You have plenty of time for buffering out the HP and the slightly dinged AAoA, and your scores are already sky-high to allow for this.

Of course, 21 months vs 2.5 years would mean the payment would go up slightly, and that is fine.

I ask these questions because I’m looking to buy a house in the next year or so and the answers will help me assess if it’s worth the trouble. In case this helps, here are all my stats that I can think of:

• $65,700 annual salary
• $6,400 installment loan remaining
• $1,600 student loan remaining
• $40,000 Amex credit limit ($0 balance)
• $28,000 Costco Visa credit limit ($0 balance)
• $10,000 line of credit from bank ($0 balance)
• 817 Fico Experian credit score per Amex
• 782 Fico Equifax credit score per Costco Visa

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[Anonymous]

That’s an interesting point about credit card utilization vice installment utilization.

• student: 1,600/18,000
• installment: 6,400/7,400

And that’s a cool fact about the balance! I’ve been paying the balance off a few days before my statement is released because I thought the less your utilization, the better. Anyway, I appreciate everyone’s quick reply and have just a few more questions:

1. I suppose there is an optimum amount of utilization? 1 cent or 1 percent, perhaps?
2. What is HP in this context?
3. Perhaps another thread for this question is appropriate. But in the meantime, will a hit of 30 points impact my ability to get the best interest rate?

[SouthJamaica]

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@Anonymous wrote:

I have a 4.5% installment loan with about 2.5 years and $6,400 remaining. I always use my credit card to make the payments on this account each month because:

1. Costco visa rewards
2. No credit card transaction fee from the lender
3. Credit card balance paid in full every month

When Costco made the switch from Amex to Visa, I got an Amex Blue Cash Everyday because I wanted to continue my relationship with Amex. Aside from that, I haven’t been in the market for a new credit card in about a decade because I always had what Costco gives me. I guess you can say I’m pretty ignorant to what else is out there these days. But I recently realized that CIti has a 0% financing offer for a period of 21 months when you open a new SImplicity account with them.

That piqued my interest when I realized that I could get one of those 0% Citi cards, use it to pay off the entire installment loan, make payments to the credit card company instead, and save money in the process because the lender will not penalize me for paying the loan early or for using a credit card to do so. To the Credit Score Gurus out there I have the following questions:

1. How will carrying a balance of that size on a revolving credit account impact my credit score?

It depends on the credit limit you have; going over 29% is a no-no.

1. How will essentially closing that installment account impact my credit score?

If you had no other open installment loans, it would hurt your FICO 8 score, and probably

reduce some other scores, but since you have the student loan it might not hurt you at all to close the auto loan.

1. Impact on credit score of doing both simultaneously?

Of course, 21 months vs 2.5 years would mean the payment would go up slightly, and that is fine.

I ask these questions because I’m looking to buy a house in the next year or so and the answers will help me assess if it’s worth the trouble.

In my opinion it's not worth the trouble. Better not to change anything in the period leading up to a  mortgage application.

In case this helps, here are all my stats that I can think of:

Having a 3rd revolving account will pro

• $65,700 annual salary
• $6,400 installment loan remaining
• $1,600 student loan remaining
• $40,000 Amex credit limit ($0 balance)
• $28,000 Costco Visa credit limit ($0 balance)
• $10,000 line of credit from bank ($0 balance)
• 817 Fico Experian credit score per Amex
• 782 Fico Equifax credit score per Costco Visa

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[SouthJamaica]

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@Anonymous wrote:

That’s an interesting point about credit card utilization vice installment utilization.

• student: 1,600/18,000
• installment: 6,400/7,400

And that’s a crazy fact about the balance! I’ve been paying the balance off a few days before my statement is released because I thought the less your utilization, the better. I suppose there is an optimum amount?

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The optimum for credit card utilization is all accounts but one reporting a zero balance, with one card reporting a small balance. The reported balance can be as little as $10 or $20, and can't be higher than 29%.

The optimum for overall installment loan utilization is 9%. Although this factor has major effect on FIC0 8 and FICO 9, it is much less clear whether, and if so to what extent, the mortgage scores give a rat's a** about overall installment utilization. E.g., there are some who think that the TU mortgage score doesn't react to it, while

the EX mortgage score does react slightly. My personal experience was that the TU score did move, much less than the FICO 8, but more than slightly, while the EX mortgage score didn't budge a point. But if you wanted to optimize installment utilization, your best bet would be to let the auto loan balance drift down to the same neighborhood as the student loan, and pay off the student loan as slowly as possible.

[Anonymous]

I’m glad you suggested it might not be worth the trouble to do this. I’m cheap and saving a few hundred dollars in interest sounds nice on paper, but not if it would result in a higher mortgage interest rate.

I also like your strategy on the student loan. I’ve actually been doing just that in order to age the account as much as possible: I paid it down quickly (graduated/started paying 4 years ago), but now I’m paying $50 a month because the interest each month is less than a Happy Meal and it’s my second oldest open account.

Oh- thanks for the utilization tip, I’m definitely going to be experimenting with it now.

[SouthJamaica]

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@Anonymous wrote:

I’m glad you suggested it might not be worth the trouble to do this. I’m cheap and saving a few hundred dollars in interest sounds nice on paper, but not if it would result in a higher mortgage interest rate.

I also like your strategy on the student loan. I’ve actually been doing just that in order to age the account as much as possible: I paid it down quickly (graduated/started paying 4 years ago), but now I’m paying $50 a month because the interest each month is less than a Happy Meal and it’s my second oldest open account.

Oh- thanks for the utilization tip, I’m definitely going to be experimenting with it now.

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Exactly, the mortgage interest rate is so much more important than the other stuff.