Installment Utilization and Pledge Loan Impact

[u/Kiwifrozen1011]

tldr; What I’m considering is the impact of getting a pledge loan for an absurd amount (let’s say 100k for simplicity), and paying it off 95%+ so that it’s nearly paid off but also so it brings my overall utilization to below 50%. I know an even larger number would be even better, I just don’t think I have the liquid funds to swing that.

So my question is, would this idea help not only in terms of points but in the appearance of my profile to lenders overall?

Background/Story Info:

I know this is an extremely technical question, hopefully some of the pros can weigh in. The impact I’m looking to measure is particularly on FICO 8’s and Mortgage Scores.

I have auto and student loan debts, both with extremely low interest rates where I’m in no rush to pay them down early. Student loan accounts (3 in total) are high 90%’s while the auto loan is around 78%. With that said the combined utilization is close to 95%.

One of the rejection codes I see most often (on pre-approvals I’m not picking up useless inquiries) is some variation of “Proportion of loan balances to loan amounts is too high”.

My credit mix/diversity is already good and I have a pretty thick file where one new account won’t even make a dent. I know on mortgage scores this will have a bigger impact but I did just go on a mini spree for sign up bonuses/new cards so it seems like the right time so everything ages together.

[u/BrutalBodyShots]

You're looking at this the wrong way. Installment loan utilization matters next to nothing relative to revolving utilization. When talking "worst" installment loan utilization relative to best, there's about a 25 point span in terms of the bonus difference. When talking the same span for revolving utilization, you're looking at 100 points or more on some profiles. Loans are not a good way to build credit, and trying to game them doesn't make much sense in most cases.

So my question is, would this idea help not only in terms of points but in the appearance of my profile to lenders overall?

The point difference would be minimal as illustrated above. The difference in terms of profile appearance would be ZERO. Literally nothing. Why? Because lenders don't care about gimmick loans. They aren't stupid. They'd look at your profile absolutely no differently if you have an auto loan and student loans all "paid as agreed" verses those same accounts with a gimmick "pledge loan" alongside them.

My suggestion would be to drop the idea all together.

[u/soonersoldier33]

I'm inclined to agree with u/BrutalBodyShots on this one. In certain cases, I'm a big proponent of credit union Share Secured Loans (aka Pledge loans) as both a way to build a relationship with the credit union, and a viable way to optimize many different FICO scoring metrics on a credit profile that is absent any other installment loan data, but here's why it's not a good fit for you, and I'll be as 'technical' as I can here.

1. First, non-mortgage installment loan utilization is weighed much less heavily than revolving utilization, and it is only scored by FICO algorithms (including 2/4/5 and 8) in the aggregate. While there may be other unconfirmed scoring thresholds, the only 2 known scoring thresholds that award points are at 65% and under 9.5%. The under 9.5% can yield anywhere from 15-35 points, depending on the model and credit profile. The under 65% is a much smaller award. For your profile, getting your aggregate installment utilization down to 50% or so, the potential score bump just from this metric would be negligible, at best, bc of the potential impacts to other scoring metrics.
2. Under Amount of Debt (Amounts Owed), this would be another 'Account With Balance', which may or may not put your profile over an AWB% scoring threshold that could cost you points. Since you already have other loans with balances, even optimizing your revolvers at AZEO may not be able to fully optimize AWB metrics, and another account with a balance just makes it even harder. Also, even though you're going to immediately pay the balance down to somewhere under $10K, whatever balance you leave reporting will be added to your profile's 'raw dollar' amounts, and if it pushes you over a raw dollar scoring threshold, that could cost some points.
3. Under Length of Credit History...so, I saw where you said you've already added some new accounts recently, but adding another new account with the SSL would impact the following aging metrics: Average Age of Accounts (AAoA) would be lowered even more by another new account, and this is a scoring factor in all FICO models; Age of Youngest Account (AoYA) would be reset to 0, and this is a scoring factor in all FICO 8 models, and a segmentation factor in FICO 2/4/5 models that lasts for 18 months; Average Age of Installment Accounts (AAoIA) would be lowered by a new loan, and this metric is believed to be tracked by all models except TU8; Average Age of Open Installment Accounts (AAoOIA) would be lowered, and this metric is believed to be tracked by all models except EQ8. Lastly, the 'spree penalty' or Too Many Accounts Recently Opened could be triggered by another new account, and this 'penalty' is thought to be assessed for 12 months on FICO 8, if triggered. In the beginning, a new SSL could only 'hurt' each one of these aging metrics, and on the mortgage scores, it would be 18 months before your profile segments back to a 'No New Account' scorecard.
4. Under Credit Mix, the new SSL would have absolutely no positive effect. With multiple loans and revolvers, you already have Mix Diversity covered, and on EQ 8 only, there's the possibility of triggering the 'Too many installment accounts' reason code.

I totally understand what you would be trying to accomplish, but in my opinion, this strategy would be much more likely to initially cause score loss in FICO 2/4/5 and 8 models, and then would only have a tangible positive effect when aging metrics fully recover at 18 months and if it brought your aggregate installment utilization down to under 9.5% by then. In the short-term, I can't see how your profile/scores would benefit at all.