@Anonymous wrote:
Quick question: why is it advised to pay off immediately 91% of a secured loan?
Good question. A few things to clarify first. The issue involved doesn't have to do with secured loans vs. unsecured loans. It has to with the way FICO 8 scores open installment debt.
And that scoring factor is something that we'll call "installment utilization" -- for a lack of a better phrase. It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.
That factor 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. The total number of points you can get is about 40 in FICO 8, though many people realize only 30 or so. In some other scoring models (e.g. two of the three mortgage scores) you get no scoring benefit at all from a low IU.
One of the mods here on this forum (Revelate) figured out a few years ago that a person with no loans of any kind could duplicate this scoring bonus by taking out a small "share secured" personal loan, paying almost all of it off, and then keeping it open for the full term (typically 60 months). That last piece is the tricky bit, since many lenders will require that you keep making the monthly payment. But some do not, in which case you can keep it open for most of the original loan term. Navy Fed is an example of a lender for which the Share Secured Loan Technique works. So does Alliant, though you need to take out an unsecured loan with them.
