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Paying Off Personal Loan and Getting a New One - Strategy?

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Regular Contributor

Paying Off Personal Loan and Getting a New One - Strategy?

Hi All,

 

I have an unsecured home improvement loan I got a couple years ago.  I will be paying it off early in December when I get my annual bonus.  I then want to turn around and get another home improvement loan for my next round of projects. 

- right now my credit score is about 735, I am hoping it gets over the 740 mark by then;

 

Is it better to close the first loan end of December, wait for the loan close to hit my credit, and then apply for the next one?

 

OR

 

Will it cause a drop in my credit score where I should get the second loan applied for before any of that hits my credit? But then again, will having the still-open personal loan ($4k balance, $160 a month) - hurt my chances at a new loan since it doesn't show on my report that I just paid it off? 

 

I should also say that I have six figures in student loan debt that I pay about $475 a month on income-based repayment. I am never entirely clear how that line item affects creditor's view of me, as on one hand it's a big balance, but the repayment plan itself is very manageable and ive always paid it on time. But, because I do have that loan balance, I am always cautious that maybe creditors will not like it.

 

Anyway, thanks in advance for any input you may have!



Starting Score: January 2014 Experian: 713 Equifax: 668 Transunion: 691
December 2015 Score: Experian: 766 Equifax: 751 Transunion: 759
October 2018 Score: Transunion:735


Goal Score: 800’s across the board

Take the myFICO Fitness Challenge
Message 1 of 8
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Valued Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?

Ultimately, what a person needs to improve their FICO scores and build credit are three open credit cards (secured or unsecured) in good standing and one open installment loan in good standing such as a car, home, student, personal, share secured, or credit building loan. This combination is what the myFICO score theorists here have determined is what you need for optimal credit building and FICO score. You can have more CCs and more installment loans, however, this will not increase your FICO scores.

An installment loan will have its greatest impact on your FICO score when the amount owed is at 8.9% or less of the original amount owed which is usually in the final months before the loan is paid in full. 

















Your FICO credit scores are not just numbers, it’s a skill.

Message 2 of 8
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Regular Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?

Thanks! So you're saying that instead of paying it off and closing it, maybe I should just pay it down to say, 5% of the beginning balance and let that show up on my report?



Starting Score: January 2014 Experian: 713 Equifax: 668 Transunion: 691
December 2015 Score: Experian: 766 Equifax: 751 Transunion: 759
October 2018 Score: Transunion:735


Goal Score: 800’s across the board

Take the myFICO Fitness Challenge
Message 3 of 8
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Valued Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?

A lot of folks will pay down a loan to 8.9% and pay on it for as long as the original terms allow to maximize their FICO score. 

















Your FICO credit scores are not just numbers, it’s a skill.

Message 4 of 8
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Super Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?

The key scoring factor in this case is something called Total Installment Utilization (which I'll abbreviate TIU).  Below are the conceptual tools you need to figure out your TIU at any point in time, and in particular to predict how the TIU will change as new loans appear or old loans close.

 

TIU measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

 

Because you already have a loan with a gigantic balance (student loan) the closing of a little loan or the addition of a little loan will change your TIU very little.  It's important, however, that you read through the above paragraph and experiment with computing your TIU as the small loan falls off or the new one comes on.  It's important so that you understand why and how FICO scores behave the way they do.  That way you'll be empowered to make the best decisions for yourself.

Message 5 of 8
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Valued Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?

Great advise CGID!

















Your FICO credit scores are not just numbers, it’s a skill.

Message 6 of 8
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Super Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?

PPS.  There is little evidence that individual installment utilization (a given balance to loan ratio considered purely by itself) matters much.  That's why you are likely to get little scoring benefit from paying down one specific loan to under 8.99% -- you need to consider your entire set of open loans together (which is TIU).

 

There's been some conjecture (based on a few case studies) that loans that have an individual installment utilization of > 100% experience a (possibly small) FICO 8 scoring penalty, and that this IIU penalty goes away when the balance gets below 98.99% (and stays below that mark). 

 

Aside from that (hypothetical) issue, TIU is the thing to focus on rather than IIU.

Message 7 of 8
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Super Contributor

Re: Paying Off Personal Loan and Getting a New One - Strategy?


@Anne1208 wrote:

Hi All,

 

I have an unsecured home improvement loan I got a couple years ago.  I will be paying it off early in December when I get my annual bonus.  I then want to turn around and get another home improvement loan for my next round of projects. 

- right now my credit score is about 735, I am hoping it gets over the 740 mark by then;

 

Is it better to close the first loan end of December, wait for the loan close to hit my credit, and then apply for the next one?

 

OR

 

Will it cause a drop in my credit score where I should get the second loan applied for before any of that hits my credit? But then again, will having the still-open personal loan ($4k balance, $160 a month) - hurt my chances at a new loan since it doesn't show on my report that I just paid it off? 

 

I should also say that I have six figures in student loan debt that I pay about $475 a month on income-based repayment. I am never entirely clear how that line item affects creditor's view of me, as on one hand it's a big balance, but the repayment plan itself is very manageable and ive always paid it on time. But, because I do have that loan balance, I am always cautious that maybe creditors will not like it.

 

Anyway, thanks in advance for any input you may have!


@AS @CreditGuyInDixie has pointed out, in view of your large student loan balance, it doesn't really matter.


Total revolving limits 653000 (575000 reporting)

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