Simulator Question...

[Anonymous]

Hello,

I incurred a large amount of debt ($35,000) over the past 12 months purchasing inventory for my e-commerce business.  I am now in the position to pay off the debt. I used the online simulator through myfico and found that my score would significantly improve if I paid $3000/mo over the next 12 months - and only marginally improve if I paid it all off in one lump sum.  The difference in scoring is pretty substantial - and I'd love a weigh in from the forum. 

Simulator:  $3k/mo for 12/mo

823  /815 / 816

Simulator:  Pay off in full 

758 / 810 / 761

Thanks! 

[sjt]

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@Anonymous wrote:

Hello,

I incurred a large amount of debt ($35,000) over the past 12 months purchasing inventory for my e-commerce business.  I am now in the position to pay off the debt. I used the online simulator through myfico and found that my score would significantly improve if I paid $3000/mo over the next 12 months - and only marginally improve if I paid it all off in one lump sum.  The difference in scoring is pretty substantial - and I'd love a weigh in from the forum. 

Simulator:  $3k/mo for 12/mo

823  /815 / 816

Simulator:  Pay off in full 

758 / 810 / 761

Thanks! 

---

Part of the reason for the additional points when paying off over 12 months is that the simulator also takes into consideration that your accounts will age.

[Anonymous]

I assume that the debt you are talking about is on credit cards.  Is that right?

The simulator is not entirely wrong, but when it gives these two scenarios it is misleading.  I am guessing it is evaluating the following two scenarios:

Pay off all the debt in the next 12 days -- what will your scores be in Oct 2016?

Pay off the debt gradually over 12 months -- what will your scores be in Oct 2017?

In the second scenario, you are getting a bunch of "hidden" benefits.  For example, all the inquiries currently on your reports will be over 12 months old, and therefore will stop hurting your scores.  If you have several inquiries (depending on the CRA) that could help you out a fair amount right there.  Likewise, your Age of Oldest Account" will have increased by one year.  And your AAoA will have increased by one year.  If FICO is penalizing you for opening any "new" accounts, those penalties may also have go away.  Etc.  Etc.

An ordinary Joe looking at the results of the simulator would not realize that the Simulator was considering all those hidden benefits.  He'd assume that there must be a scoring benefit from making "regular payments" on his credit cards and gradually paying them down, vs. paying them down all at once.  This is completely untrue, though a newcomer to credit would not know it.  The simulator in this respect misleads him into this particular error.

I will also say that even given the hidden benefits, the simulator sounds to me to be exagerating.  One of your CRA scores is going to 823 in scenario 2 and only 758 in scenario 1.  That's 65 extra points.  Unless you have 30 inquiries with that CRA, I am having a bit of a hard time seeing where you'd get 65 extra points.  So the simulator may just be acting strange.

In short, if you can pay off the CC debt now with no financial hardship, do it.  There's no scoring benefit in waiting and you will save yourself a lot in interest.

[Anonymous]

I personally don't believe that simulators are accurate at all.  Simulators ask maybe 10 questions about your credit profile and spit out a score based on that extremely limited data.  Credit profiles contain an infinite number of data points with respect to one another; there's no way IMO that a simulator using such limited amounts of data can spit out a score with any sort of accuracy.  I tend to believe that any time they get close it's more of a coincidence than anything else.  For me personally, most simulators are anywhere from 50-75 points off from actuality.

[sjt]

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@Anonymous wrote:

I assume that the debt you are talking about is on credit cards.  Is that right?

The simulator is not entirely wrong, but when it gives these two scenarios it is misleading.  I am guessing it is evaluating the following two scenarios:

Pay off all the debt in the next 12 days -- what will your scores be in Oct 2016?

Pay off the debt gradually over 12 months -- what will your scores be in Oct 2017?

In the second scenario, you are getting a bunch of "hidden" benefits.  For example, all the inquiries currently on your reports will be over 12 months old, and therefore will stop hurting your scores.  If you have several inquiries (depending on the CRA) that could help you out a fair amount right there.  Likewise, your Age of Oldest Account" will have increased by one year.  And your AAoA will have increased by one year.  If FICO is penalizing you for opening any "new" accounts, those penalties may also have go away.  Etc.  Etc.

An ordinary Joe looking at the results of the simulator would not realize that the Simulator was considering all those hidden benefits.  He'd assume that there must be a scoring benefit from making "regular payments" on his credit cards and gradually paying them down, vs. paying them down all at once.  This is completely untrue, though a newcomer to credit would not know it.  The simulator in this respect misleads him into this particular error.

I will also say that even given the hidden benefits, the simulator sounds to me to be exagerating.  One of your CRA scores is going to 823 in scenario 2 and only 758 in scenario 1.  That's 65 extra points.  Unless you have 30 inquiries with that CRA, I am having a bit of a hard time seeing where you'd get 65 extra points.  So the simulator may just be acting strange.

In short, if you can pay off the CC debt now with no financial hardship, do it.  There's no scoring benefit in waiting and you will save yourself a lot in interest.

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When my friend used the simulator, there was only a few points difference between paying off the balance all at once and over a two year period. He has a bunch of derogs/charge-offs that are scheduled to fall off his reports within two years.

[sjt]

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@Anonymous wrote:

I personally don't believe that simulators are accurate at all.  Simulators ask maybe 10 questions about your credit profile and spit out a score based on that extremely limited data.  Credit profiles contain an infinite number of data points with respect to one another; there's no way IMO that a simulator using such limited amounts of data can spit out a score with any sort of accuracy.  I tend to believe that any time they get close it's more of a coincidence than anything else.  For me personally, most simulators are anywhere from 50-75 points off from actuality.

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Was those score differences in your favor or not in your favor?

[Anonymous]

Not in my favor.  Simulators were showing me scores around 670 when my actuals were in the 730's.

[elim]

Pay it asap if it saves you $. Your score will most likely be the same in 12 months and your internals may even be better.