What to do about number of accounts with balance? Pay off or reduce utilization?

[dg2005]

We've been cleaning up my wife's formerly great credit and have hit a plateau.    We've removed all the low hanging fruit (collections) and can't seem to move the TU score (only moved 5 pts on removal of last collection). We need to get to 720 to take advantage of some good mortgage deals available as part of a relocation package.

TU 684 ;  EQ 743

MyFico indicates that the only negative we can address is the number of accounts with a balance:  " You have too many credit accounts with balances."  MyFico notes that high achievers have average of 3 accounts.

However, I've read mixed things on whether paying off installment loans will have a positive impact -or, a negative surprise.  We had been planning on paying off one or two of the smaller balance loans to get down to 3 or 4 accounts.   However, I am no longer sure whether this will give us a positive impact.    

We would have paid off the auto loan (about 25% utilization & 4 years old) and/or a student loan (77% utilization; 16 years old).   The two other student loans are much higher balances  with around 85%-92% utilization and 9 years old.

Not sure whether it would be smarter to pay down one or more of the other student loans to get below 80% utilization or some combination of pay-down and pay-off (I would welcome a lower DTI ratio). Or, some other strategy?   

Any advice would be appreciated. 

Background: 

She has a 22 year history;

Average age 14 years; 

6 accounts with a balance (5 actually, one cc paid off recently) ; 

Of the 6:   3 student loans; 2 auto; 1 Amex card (paid off but not reflected yet); 

She has several other installment loans which have been paid off (student loans; auto)

A couple of zero balance credit cards (one store and one visa) which she never uses.

Negatives: 

3 accounts with late payment as follows: 

2 60 day lates on the student loans (11/08 & 7/08; one each on two different accounts);

3  30 on one auto (in 2006; my fault).

Cannot get goodwill on either of them. 

Other than that, completely clean.   Scores had been 740 plus prior to the 60 day derogs.

[jackg]

dg2005,

The comment you got from FICO is very literal, don't read anything more than that into it. The convential wisdom I've always used in this area is that regardless of the number of accounts you have you should never allow more than 50% report with a balance due. This includes all types credit, revolving, installment, mortgage.

The 80% utilization is not good. In FICO's scoring model the segment called "Amounts Owed" counts for 30% of your overall score.

[dg2005]

Thank you.  So, I take your response to mean that I should focus on utilization reduction.  If so, do the credit bureaus average all accounts w / same weighting or is do they look at total debt to total high balance?  How are paid accounts factored in, if at all?

[haulingthescoreup]

Hi, welcome to the forums!

Installment util doesn't drive your scores very much. That's why you don't have "high util" as your negative. The util that swings scores is revolving util: CC's and lines of credit with CL's of under $30K or so.

FICO scoring calculates revolving util and installment util separately. Paid accounts with $0 balances are ignored for util calculations.

The problem is that she has only one CC and five open installment accounts, so there's no way that she can have half or fewer (3 or fewer) accounts with balances. By definition, open installment loans have balances, so she's kind of stuck with the current configurations.

Do you have any open, clean CC's onto which you can add her as AU (authorized user)? If you can get things to where she has as many (or more) open revolving accounts as installment, that should help break the TU logjam. So if you could add her to two of your cards, assuming that they will report on TU, and pay off two smaller installment loans, she will have 3 open CC's and 3 open installments. Better still, she needs one more CC than installment, because scores are often better when 1 CC reports a minimal balance. (Strange, but true.)

Anyway, that might be what you want to shoot for. Also, have you had a TU score pulled by a lender? There are two versions out there, and myFICO uses the older one. It's possible that her current score would be higher with the newer TU formula, called TU 04.

As to whether this will do the trick, that's hard to say. It looks like this is her third-listed negative, meaning that the lates are driving her scores more than the number of accounts with balances. It's definitely worth a try though. It also might cheer up the mortgage lender, because they do look at overall debt to income, which FICO scoring does not. hth



If you haven't already, please read Understanding Your FICO ® Score and Credit Scoring 101 (at least the first post.)

These will give you the background knowledge you need to understand what you read here on the forums.

[dg2005]

Thanks, these forums are extremely helpful and I am grateful for your advice.   I have read the intros but should probably re-read.  

I'll check about adding her to one of my cards.

However, she does have two additional cards:  One visa and one store.  Both have zero balances and are still open.

So, she has three credit cards (one AX, technically a charge; one visa; and, one store card  - Macy's).

If we: (1) pay off the two smaller installment loans; and (2)  add her to one of my cards,  that would give her four revolving and three installment.  Additionally, we need to have at least one revolving report a small balance (currently, everything is zero balance- though not reflected in reports yet).  That is the best course of action?

Would there be any negative to account aging?   Her current average age of account is 14 years.   Paying off the two smaller accounts (one at 16 years and the other 4 yrs), would actually drive her account age up - which is good, correct?

As an aside,  I've been thinking about making sure mine still reports a small balance as my TU score is 799 and I'd like to push it over 800 - just have a hard time with the logic that some debt is better than none.   

We have not had score pulled by a lender as we didn't want the hard inquiry.  Could they do a soft pull?

Thanks again.

[haulingthescoreup]

Yes, adding one more card ought to do the trick. It doesn't matter whether it's charge or credit, store or bank; just so it's revolving. (Which all these are.)

Closed accounts generally continue to report for 10 years after closing, although Equifax likes to lose them early. So there will be no immediate effect on her AAoA. It's possible that if you add her to one of your newer cards, that will drop her AAoA. The ideal AU card is clean, older than the existing AAoA, and reports $0.

As to whether you want one of your own cards to show a balance, that's up in the air. Mine accidentally reported all $0 (Discover reported twice), and I lost 12 on EQ, but I gained 5 on TU. Since you're looking at TU, you might well do better to have them all at $0. TU is traditionally the touchiest about this.

I don't think that a lender could do a soft pull, as you are not yet a customer of theirs, so they wouldn't have permissible purpose. Once you actually start the serious business of applying, keep your mortgage apps within a tight time frame, so that they will be "de-duped" (counted as one) for FICO scoring purposes.

I think you're on the right track here. I assume that you're applying jointly, and you need to get her middle score as high as possible. If she has any old unpaid business in her credit history, she should freeze her reports before applying for the mortgage. The CRA's have a charming side business in selling the names of people applying for mortgages to collection agencies, so that the CA's can try to find some old garbage to hit you with at crunch time.

Anyway, when you have a chance, read those two links I provided above. They'll have some more info.

[dg2005]

Thanks again.   Nice little business the credit bureaus have.   

Assume freezing the accounts won't have any negative impact with the mortgage lenders?  

We think we've caught all the odd little stuff milling about but I have noticed a couple of strange soft pulls on mine.   Almost certain they are for small medical bills which dropped through the cracks of of our health plan (very confusing as to when we pay as our statements  - not bills - were always exquisitely unclear as to whether we owed anyone money).   I have paid several small ($7 to $40) ones directly to OC without even trying to determine whether my old health plan should have paid - just got tired of resting on principle.

However, I did receive a letter from NCO for a water account I haven't had since January, 2000 - and, was satisfied.  I'm sending them a SOL letter.

Otherwise, did have a hard inquiry (????) from some collection law firm in FL - on Experian only.   Haven't yet addressed as yet as did not authorize and did not want to wake the beast figuring I had them on an unauthorized hard pull if they come my way.

Guess that is getting far afield from original post and likely belongs elsewhere.   However, your comment on freezing accounts got me thinking.

I'll let you know how it (the original issue) turns out. 

[RobertEG]

Just an aside comment to your aside remark!  I would not send anything to NCO, period.  It is past 7 1/2 years from the DOFD on the OC account, so they cannot post to your CR.  And iff they bring legal action, it is beyond SOL, so you will win in court.

There is really no such thing as an "SOL letter."  SOL is something you prove in court, and there is no need to argue this with the CA.  They know it.  I would just ignore them.