Credit utilization rate considers installment loans
Q: I understand that credit utilization rate takes revolving credit lines into account, but does it consider installment loans. If my car or student loan is at 90% utilization rate, will my credit score take a hit? If I bring it down to 60%, will that improve the score?
A: It does without a doubt. The only question remains how strongly or rather weakly. Credit utilization rate or ratio, sometimes called debt utilization ratio or even debt to credit ratio is often mistakenly defined as the amount of outstanding balances on all credit cards divided by the sum of each card limit, and expressed as a percentage.
FICO, however, also looks at each individual credit card / revolving account as well as your installment loan situation. You can see the following parameters that carry some weight under Amounts Owed
- amount owing on accounts
- amount owing on specific types of accounts
- lack of a specific type of balance, in some cases
- number of accounts with balances
- proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
- proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
I underlined the word 'installment' in case you still have doubts. And the general thinking is that installment loan credit utilization rate is much less important than that of revolving types. And it makes sense, because with installment loan you can not easily borrow money again and again, whereas with revolving type, you can do it over and over. The best example is conventional installment mortgage and revolving Home Equity Line of Credit. You can only borrow more on installment mortgage if you refinance and take cash out which requires certain safeguards like proof of employment, low enough loan-to-income ratio and fees, while with HELOC, you can just go ahead and write yourself another check as long as you have space between your credit limit and balance.
I doubt very much that having 90% credit utilization ratio is very detrimental to your scores. All it says is that you have a new loan and unless your credit history is quite fresh, bringing down that new installment loan to 60% or less may not make much sense from the way FICO looks at your credit utilization rate.
Thu May 6, 2010 12:05PM | Copyright: www.bad-credit-advisor.com | More in Credit Score Help | Comments (0)
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