Installment Loans - Hurt or Help?

Discussion in 'Credit Talk' started by adcgroup, May 21, 2007.

  1. adcgroup

    adcgroup Well-Known Member

    I don't currently have an installment loan reporting, but soon will have so it's kind of moot for me, however, for years Experian has said one thing while TU/EQ say another.

    Here's what Experian says in listing this as 1 of the top 4 things raising my score:
    Here's what TU/EQ say as one of the factors lowering my score:
    So, if you don't have an installment loan on your CR, will opening one show that you have a balance of credit experience and help you, or will it show that you're not as likely to pay your other bills and hurt you?
     
  2. ontrack

    ontrack Well-Known Member

    You can't trust automatically generated advise.

    Total debt is what indicates how much cash flow is NOT available to pay other bills. Total debt is normalized by determining debt to available credit, one of the factors in FICO, since FICO has no visibility of income.

    Credit is only a tool to improve your bottom line, not an end in itself. If you choose to borrow, do so on the best terms, and don't expect to somehow benefit from paying more than money is worth. If installment loans cost more than revolving credit, why would you use them?

    Pay yourself first. The bottom line, your bank account, is real. All else is speculation.
     
  3. adcgroup

    adcgroup Well-Known Member

    Sure, but what they're saying seems to indicate generally how types of debt are perceived - except in this case there's conflicting opinion.

    I'll give you an example. For years, I've bought cars for cash. I did that primarily because I didn't have a good enough credit score to qualify for an auto loan with decent interest rates (if at all). If I could have qualified for a decent auto loan, there are times I would have been able to afford a reliable car rather than an old beater that let me down all the time. If it turns out that having an installment loan on my credit profile would have helped my score so that in the future I could have qualified for a decent auto loan, I would have financed a cheap car for a short term and sucked up the high interest for a few months for the long term.

    If, on the other hand, installment loans hurt your credit significantly, you wouldn't want to have an active car loan while you're trying to buy a house if your credit score is marginal.

    I'm know that credit is only a tool and the bank account is what matters, but I just want to sharpen my tool as best I can. I've found that the bank account gets a better when the credit report gets better.
     
  4. cajun1969

    cajun1969 Well-Known Member

    I have run 3 vehicle loans,2 mortgages,& one investment mortgages thru my report and it looks to me like it helps some. My file is thinner than some because I don't care for having a wallet full of plastic.I have four now and only use maybe two.I have earned my score with sixteen years of positive payment history.I know once I got my first home mortgage is when the credit card offers really started coming with better terms.
     
  5. ontrack

    ontrack Well-Known Member

    If you were manually underwriting loans, you would be able to "perceive" things from credit reports. Credit scores are calculations, and need not be based on human perception.

    Scoring systems calculate based on the rules built into them. They do NOT "perceive" in any manner. They are built up from their scoring models and tweaked by comparisons between actual consumer credit and default data.

    As such, although the factors considered might be chosen based on human understanding, including what is permitted by law, the relative weighting that gets used in the score calculation may be empirically and statistically driven. There may also be different weighting used, depending on different categories of credit users, such as mortgage holders, vs. non-mortgage holders, short credit history vs. long, etc. You could construct a "blended" model, that transitions between one set of weights at one end, to a different set of weights at the other.

    When the goal is to estimate the risk and likelyhood of default, the calculation need not be the same for all, or even linear, and the weighting factors might even change over time, as you would expect if you were trying to estimate risk thru varying economic conditions.

    Note that having a mortgage DOES result in you being specifically targeted for particular credit solicitations. FCRA allows the CRAs to market their lists to companies making "firm offers of credit", and those companies set specific parameters on what consumer's are selected to generate those lists. Those parameters may include not only factors that may affect creditworthyness similar to what FICO would calculate, but also whether you have a mortgage, etc. That would be of interest to lenders interested in doing refi mortgages.

    Note that I have no specific knowledge of what FICO or other score calculations do, other than reading between the lines of various explanations by Fair Issacs or the scores promoted by the CRAs. Those limited explanations, intended for consumers or lawmakers, allow for a broader process than just assigning so many points to each input factor, so I must assume that hints at what they are actually doing.
     
  6. adcgroup

    adcgroup Well-Known Member

    My point was merely that installment loans might be "perceived" by the algorithm as bad in the same manner that the algorithm "perceives" positive or negative things about consumers with no mortgage or fewer than 2 credit cards. While those are not clearly good credit/bad credit issues, the FICO algorithm takes them into account. I'm not trying to assign life to a formula, I just lacked a better term.

    To be clear, most of us would assume that having a mortgage on your credit file is generally better than not having one. Likewise, most of us would concur that having 2 credit card accounts will help one's score (all other things being equal) as opposed to having no CCs at all. I would merely make the hypothesis that the FICO model calculates an opinion about installment loans as well. It just seems that the rules aren't as clear.

    If the formula merely calculated amounts (utilization, number of open/closed accounts, days late, age of accounts, etc), then all of us would stand a better chance at 'cracking' it. However, non-numerical data is considered along the same statistical scale. If all other things were equal, a consumer with a mortgage would generally have a better score than one without. I have even talked with one knowlegeable gentleman who said that credit cards from different issuers were weighted differently. He briefly drew a distinction between sub-prime cards and prime cards alleging that carrying a balance on a sub-prime card made you statistically more prone to have a 90 day late, thus lowering your score. Alternatively, someone carrying the same balance on a similarly configured prime card would not suffer the same fate because statistically carriers of prime cards are less likely to have a 90 day late than carriers of sub-prime cards.

    Regardless, we all acknowledge that the Scoring Model is complex and will differ in every situation. I would merely like to hear opinions about how installment loans are likely to affect credit. Many people already have them on their reports because they are used to making car payments, so they don't know what their score would be like without them. I don't have any, so I'm curious to know if it will help - like one automated response would indicate, or whether it will hurt - as another automated response would infer. Surely that's not so complicated a question.
     
  7. bizwiz41

    bizwiz41 Well-Known Member

    In the end, whether an installment loan "helps" or not, is dependent upon how you "manage" it, as with any other credit. The FICO model does "look" for different types of debt/credit, and it does factor many facets of it. The main reason is that there are many "psychological and emotional" factors which are proven out through statistics (bear with me, I'll explain....).

    Again, the primary issue is how you handle credit, and a key factor in how you handle credit is your attitude towards it, and the "value" you place on it. This is the "soft quality" qualitative function that the FICO model try to quantify.

    Per above examples, once you show a mortgage, the CC offers "start coming"...a main "behavioral reason is that (for most people) once they start the home buying experience, they really appreciate the "value" of credit. As our posts here show, they view credit differently at that point, and go to great pains to improve it. I think we all (somewhat) agree, your attitude towards credit "shifts" upon taking out a mortgage.

    Secondly, building upon the above, there is less risk for an unsecured lender seeing that you now have assets that can be pursued should you default. Your overall financial picture is less risky. Most people would not want their home subject to a lien for a CC or other incedental debt.

    The statistics show that certain life events, and your attitude about debt and credit, cause different behaviors. The insurance industry has done extensive studies, and they show a correlation between people with higher credit scores and lower claims. This makes empirical sense, as you become more "savvy financially, you are more likely to "protect your assets". A derivation of the cliche, "the rich get richer...". I know I behave differently with these debts, on those days when the job is "too much", my thoughts are ...I have mortgages, car loans, CCs to pay, I have to suck it up and hang in there!"...

    So, to answer your question (in my opinion only!), just the addition on an installment loan on your credit report will not immediately help your (traditional) FICO score. Given time, and good performance, it wil help your score by demonstrating you can handle different types of credit and obligations.

    But, to second Ontrack's point, do NOT pursue an installment loan just to "have it on your credit report. The main point here is that credit is a tool and resource; and your credit report is an indication of how well you manage it. So, ONLY take out credit for what you need, and when it makes economic sense. Sticking to the fundamentals of financial management in the end will give you the highest credit score and history.
     
  8. adcgroup

    adcgroup Well-Known Member

    Thanks. I was just curious because for years I had a private mortgage that didn't report. I had a foreclosure in the past and didn't feel I could qualify for one. As I later found out, an active, reporting mortgage helps your credit. In the same line of thought, I was wondering if an installment loan (I have none reporting) was a help or hindrance (assuming you're paying your debts timely, of course).

    For the same reason I had a private mortgage, I paid cash for cars. I bought my last used car for $13,000 cash. If having an installment loan would help me in building my credit profile, I could have taken a loan for a short period of time and easily paid it.

    My last FICOs were 687-699-706. And that's without a current mortgage reporting or an installment loan on record. I have a foreclosure and judgment that I'm trying to overcome and so far have only had credit card accounts to use. Because I don't have a mortgage reporting yet (They're supposed to report this month), I'm not getting offers on prime cards, so I'm still stuck with Washington Mutual being my best card and a few HSBC, Cap1 types.

    I'm trying to get to 720 because some of the low docs investor loans I'm trying to get won't even consider you without 720+. I buy houses for rent and resale, so my financial picture as a whole will improve dramatically once I get there. I've worked hard to have good credit ever since my foreclosure 4 years ago and I don't intend to throw that work out the window, but if there are things I can do to increase my score 5 points here or 3 points there, I'll do it in order to accomplish the broader goal.

    This discussion is somewhat a moot point for me, but I wanted to be prepared for the outcome. I currently have a Mortgage, a HELOC, and an installment loan that are not yet reporting. The mortgage is 6 months old with GMAC and they say it will report in June as it is not their practice to report new mortgages for a while [?]. The HELOC and installment loan are a couple of months old, but I haven't been pressuring them to report. If I thought the installment loan would be bad, I'd just pay it off with the HELOC. If it doesn't give me a short-term boost, but helps in my overall profile, I'll leave it. If it cuts me 20 points to have it, I'll close it down today. I'm interested in having long-term appeal to creditors, but I also have a short-term priority in that 720.
     
  9. cajun1969

    cajun1969 Well-Known Member

    Well everyone has their own method of building your file. Ontrack is right in that payment history is very important. When I started building up my file,I took out small consumer loans from my bank and I would put the money up.I would pay on loan enough to get it reporting,then pay it off.When I paid one off,I took another with a slighter higher amount and repeated process.This was a small hometown bank that we have been with for almost twenty years. I was able to place close to twenty tradelines in less than two years on my report.Then I slowly started adding prime cards and got our first mortgage.
     
  10. bizwiz41

    bizwiz41 Well-Known Member

    With a bit more details (from your last post), I would say your more immediate concern would be "utilization". Seeing as you are on the cusp of score ratings, I think your focus would be on keeping your balances as low as possible.

    The best "use" of the installment loans for your report, may be to pay them (if you can), and let them sit for both aging and "mix" of accounts.
     
  11. adcgroup

    adcgroup Well-Known Member

    I would concur. Right now, my utilization is less than 5% ($851 reported out of $17500 total limits). Given my past profile, I wouldn't have nearly the scores I do if I used my credit cards like some folks.
     
  12. ontrack

    ontrack Well-Known Member

    "The mortgage is 6 months old with GMAC and they say it will report in June as it is not their practice to report new mortgages for a while [?]. "

    So they have found an anticompetitive policy even beyond CapOne not reporting credit limits? By not reporting a mortgage, they block their competitors from making you refi offers thru promotional inquiry lists bought from the CRAs, but it is unlikely you would be refinancing in the first 6 months anyway.

    Since a mortgage probably counts negative in the first few months, until it has some age, you might actually come out ahead if they start reporting at 6 months. That depends, of course, on whether FICO uses the loan starting date to determine mortgage age, or whether it uses the date first reported. That would be interesting to know.

    Please let us know whether your FICO goes up, or down, when they start reporting, and what they report.
     
  13. adcgroup

    adcgroup Well-Known Member

    I certainly will. I've been checking daily waiting for it to hit to see what happens. Experian's "My Plus Score" simulator would indicate that it will help by about 15 points - but then it's only a simulator.

    I'm hoping that the Mortgage, HELOC, and loan will all hit at different times so I can quantify their effect. I hate that it looks like they're all going to blast down in one month, but I didn't have much choice in that. You might sense from my posts that I'm a little nervous about it. In the long run, they could all help - but so much debt, and so fresh... I don't know.
     
  14. ontrack

    ontrack Well-Known Member

    You could buy a house, take on a load of debt, but actually end up paying less than you were renting for, and your FICO would go down. If you wait, paying on time for a while, despite having more total debt, your FICO will generally go up.

    Since FICO has no direct visibility to your actual cash flow, which is what affects your ability to pay your bills, it can only infer your ability to pay them from a history of actually doing so. Pay your mortgage for a year, and you probably have enough income to continue paying it. It's about risk, and a history of payment shows reduced risk of non-payment, beyond the absolute debt levels.

    At least that is a rationalization for what the score appears to do.
     
  15. adcgroup

    adcgroup Well-Known Member

    I guess in that case, I would expect stairstep improvements in my scores (all other things being equal) as those accounts gained age. Would I see a gradual, monthly budge, or would I see a bump at 6 months, 12 months, 24 months, etc?
     
  16. ontrack

    ontrack Well-Known Member

    I would expect FICO to act smoothly and monotonically, although I have no way of knowing.

    If you are building a model, it seems to me that it would be easier to verify its correlation with the statistics you collect to validate it if it is at least monotonic. Otherwise, you add the "quantization noise" caused by jumps that have no relevance to reality, and you would need to throw a larger dataset at it to average out that noise to a given level of confidence.

    Even if you can't get linear, you at least want smooth.

    Pure speculation, of course.
     
  17. ccbob

    ccbob Well-Known Member

    Remember the "buckets."

    As your situation changes, so does the scoring model. So you might be looking good amongst those with bad credit for a while but as your credit improves, you'll get grouped with those who have better credit and then not look so good. For example, my TU went from 600-700 then back down to 650 as things continually improved. (yes, that stung, but at least I was expecting it).
     
  18. bizwiz41

    bizwiz41 Well-Known Member

    It also depends upon what gets added to your reports, remember the FICO scoring model is an algorithm to predict probability of "default". So, the model will "ding" you as new accounts get added, because it thinks you have a greater chance to default, simply due to more opportunities from new accounts.

    I beleive the "buckets" can help or hurt you, if you add a mortgage, then normal auto loans, I perceive the "credit mix" that FICO scores on looks for those conditions to gauge your behavior.
     
  19. jd937

    jd937 Well-Known Member

    A new installment loan will probably hurt your score for about six months. Once it is paid on time for about six months it should begin helping your credit score.
     

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