@Anonymous-own-fico wrote:
@jamie123 wrote:Not that you are long winded or anything Rev...
...Are you theorizing that the installment loan "sweet spot" is reached when the aggregate of installment loan remaining balance to starting balance ratio reaches 66%?
I was just reminded that "DW had an EX 08 of 850 at a time when our mortgage balance was higher than 70%."
850 perfect score doesn't mean "perfect file" though, can have some small "blemishes" and still hit that anecdotally on a FICO 8 model. I do think there's metrics beneath 70% based on my size of drops previously, or at least that's my current working theory.
@damnedanddetermined wrote:But....how much does this help the fico score, if any? Im playing with mine too but havent seen a real change yet.
Check my first post where I have some data in it.
My theory behind it is this:
- We know that paying off installment loans can and often does drop score
- I have taken hits twice when paying off installment loans when I had 2 additional ones left open
- My initial post had my test scenario in it where I am uber clean for mortgage, and then saw appreciable movement across all my Experian scores without any other changes to my file over a short time period (other than mortgage inquiries which are still in the 30 day buffer zone).
- In general because of my derogatories my scores are absurdly flat for 6 months at a time or longer historically so it's a good file to try to isolate some changes on.
- As a result I suspect it's not just open, but installment utilization too which FICO suggests is the case (based on reason codes re: mortgage and non-mortgage loan balances) but it wasn't nearly as trivial as has been suggested in the past under the FICO 04 models.
For me, it looks like it's on the order of ~18 points give or take on a FICO 8 model, which is enough for me to care about. The bigger question is how it affects things I do truly care about like my mortgage scores, and the fact that EX 98 moved as a result of my testing and from FrugalQ's datapoint it does matter, that's a very important thing from a mortgage credit file optimization standpoint if it holds up.
It's a little hard to test with MF monitoring because changes in my installment loan balances never trigger an update on any of the bureaus... if that holds for everyone then the only real way to see it is either purchase instant in time scores when you know it's changed, or hope to get lucky with a inconsequential balance change on EQ or whatever to isolate the difference.
One more datapoint checking mortgage score specifically after USAA reported: TU explicit figuring I'll get DCU's later for Beacon 5.0. No other changes.
Wasn't as pronounced across the board as the EX one, and no movement on the TU 04 which I somewhat expected. Not expecting Beacon 5.0 to move either on this round; however, one note which is a little wierd given the industry options have different weighting factors and different scale, identical 5 point increases on TU 8 classic / Auto enhanced / Bankcard enhanced. Not reading anything really into that, but might be interesting in future data points.
| Score | 5-Jun | 12-Jun |
| TU 8 | 706 | 711 |
| TU 4 | 731 | 731 |
| TU Auto 8 | 728 | 733 |
| TU Auto 4 | 746 | 746 |
| TU Bank 8 | 723 | 728 |
| TU Bank 4 | 745 | 759 |
Hey Rev, it works with an Alliant shared secured loan too!
My next scheduled payment was for July 1st and I was unsure if it would make my auto payment on July 1st if I paid some on the loan early or not. I still don't know but we will find that out later. I just wanted to make sure that I would be under 66% total installment UTI when it reports next so I made a payment of $35. It moved my next due date out to October 1, 2015.
Look here:
Most excellent thanks Jamie!
I had somewhat thought it did for most lenders, was really surprised when DCU said "no prepayment for you!"
Will be interested to see the results on the SDFCU loan too. But if I'd known what I know now for mortgage qualification, EX 98 moves based on it, so I would've kicked my own loans well down to get to the theoretical sweeter spot for loan utilization.
My only complaints with the USAA one is 1) it's a CD, and 2) it's a minimum of $2500. Would like to be able to solve this more cheaply, but double bonus Alliant (reports from some people they did, not for me or others too) and I think SDFCU don't HP for their secured products... every little bit counts!
I've read the thread, but my brain isn't all that sharp this morning.
I'm understanding you to be saying that when you're going to make an extra payment to an installment loan, that it's better for your score for it NOT to go to principal. Rather it's better to push your payment due date out into the future. Does that mean that you're still paying interest on the higher amount, since your principal hasn't decreased?
I am pretty sure that's what my local CU does when I make extra payments (pushes the due date out). I round up on my loan payments for my car loan and another loan with them, and rather than saying the amount of my payment being due in July, they each say a bit less, relative to what I've overpaid in the past couple months. Also, if I go to make a payment manually, this is the choice I get:
I've been kinda miffed, now once I saw that when I overpay on an auto pay (ask them to take $300 instead of $274.23 or whatever) it doesn't go to principal automatically. Interested to see if I'm reading you right AND if you can point me to the place where you (or someone) explained why it extending the payment vs. principal is good for fico.
@Anonymous wrote:I've read the thread, but my brain isn't all that sharp this morning.
I'm understanding you to be saying that when you're going to make an extra payment to an installment loan, that it's better for your score for it NOT to go to principal. Rather it's better to push your payment due date out into the future. Does that mean that you're still paying interest on the higher amount, since your principal hasn't decreased?
I am pretty sure that's what my local CU does when I make extra payments (pushes the due date out). I round up on my loan payments for my car loan and another loan with them, and rather than saying the amount of my payment being due in July, they each say a bit less, relative to what I've overpaid in the past couple months. Also, if I go to make a payment manually, this is the choice I get:
I've been kinda miffed, now once I saw that when I overpay on an auto pay (ask them to take $300 instead of $274.23 or whatever) it doesn't go to principal automatically. Interested to see if I'm reading you right AND if you can point me to the place where you (or someone) explained why it extending the payment vs. principal is good for fico.
Installment loan payments generally work on zeroing out any accrued interest and then the rest of the payment goes to principal. In your case any extra that you auto-paid went straight to principal as there would've been no interest accrued at that point (since your regular payment zeroed it out). Simple interest goodness.
You can make an unscheduled payment directly to principal for all lenders I've seen, this doesn't zero out the interest; however, it also doesn't change the due date as a result.
Where you can get a possible win is by making a large regular payment, which not only covers the interest accrued, but counts as a payment for due date purposes, and some (maybe all lenders actually, has to be a regulated way of handling payments I would think) count the overage against payment due in the future. Where this breaks down is some lenders such as DCU will reset the due date to something they feel is more "sane." which in their world is 3 months pre-payment.
As a result using my above picture as an example:
Had I made a principal payment of $500, it would've gone directly to the principal and my due date for regular payment would still have been 6/22/15.
Because I made a standard payment roughly 11X my normal $45 payment size, the next payment due date got pushed all the way out to 5/22/16. Something like $2 went to zeroing interest out of the $500, no biggie in this case. At worst you're talking one month's interest regardless; also balance is reported, but principal is what interest is calculated on AFAIK.
Since the new balance will be reported to the bureaus, this allows me to simply just hang onto the installment line for a while at a potentially "pretty" utilization rate while paying even less interest than my already trivial interest rate (since virtually all loans of these types are simple rather than compound interest). If we do get FICO bonuses based on our installment utilization, then this is an easy thing to manage: just pre-pay it to some trivial amount, set it on auto-pay and proceed to forget about it for a few years while it hangs out on your credit report.
I haven't done the math yet but on a 5 year term I think I can get 3.5ish years of pure FICO goodness (since interest will be massively diminished the amortization calendar gets whacked even if you just let it sit until the far out due date) for basically nothing but an origination fee if any and the usual credit costs of adding a new tradeline.
Also it suggests instead of just writing a check for that high interest loan, write it for the amount - $10 or $100 or whatever and just let it hang out.
@Anonymous wrote:I've read the thread, but my brain isn't all that sharp this morning.
I'm understanding you to be saying that when you're going to make an extra payment to an installment loan, that it's better for your score for it NOT to go to principal. Rather it's better to push your payment due date out into the future. Does that mean that you're still paying interest on the higher amount, since your principal hasn't decreased?
I am pretty sure that's what my local CU does when I make extra payments (pushes the due date out). I round up on my loan payments for my car loan and another loan with them, and rather than saying the amount of my payment being due in July, they each say a bit less, relative to what I've overpaid in the past couple months. Also, if I go to make a payment manually, this is the choice I get:
I've been kinda miffed, now once I saw that when I overpay on an auto pay (ask them to take $300 instead of $274.23 or whatever) it doesn't go to principal automatically. Interested to see if I'm reading you right AND if you can point me to the place where you (or someone) explained why it extending the payment vs. principal is good for fico.
Well...It is a choice you need to make...You need to decide if it is worth it....
You get extra points on your FICO score for having an OPEN installment loan on your reports. Once you pay off and close the installment loan you will lose most of those points. I would have to say that the average point loss seen on these forums from someone closing their last installment loan can range from 10 to 40 points with most people losing 20 to 30 points.
What we are also testing here is at what payoff ratio you gain the most points. When someone first gets an installment loan it doesn't do too much to their scores, good or bad. When someone pays off their last open installment loan they lose 20 to 30 points but where did these points come from? We are testing as to what remaining balance percentage gains you the most points.
We can then get a cheap share secured loan from a credit union with the longest term possible. Pre-pay the loan to hit the start of the "sweet spot" for points gain and then let it ride to the end of the loan term. You can do this with any kind of installment loan whether it is a mortgage, auto loan or personal loan. I personally have two $500 share secured loans with a credit union because the interest rate is only 2.7% which only costs me $28 total interest over 4 years per $500 loan.
I am planning on apping for a mortgage in the near future. If I can bump my score up into the next tier for mortgage loan interest rates and get a mortgage loan at .125% less interest it will save me thousands of dollars over the life of the mortgage. The $56 in interest that I'm paying for the two shared secured loans will have been well worth the cost.
To answer your question...
If you pay extra on a regular payment you will just be prepaying principal+interest and move the next due day out.
If you want to reduce the principal amount and shorten the loan term you need to make two payments per month. Make the regular monthly payment for the exact amount due. Then go back and specifically make a principal only payment. This will reduce the amount of interest that you will pay over the life of the loan and shorten the term.