New loan helps my fico score & DTI but what do lenders see?

[Zachary D.]

I'm currently paying my credit cards down each month and am seeing gradual improvements to my credit score. I don't have any delinquencies or other red flags on my report and unless something new comes up the only thing that seems to make a sizable difference to my current score are changes to the % of credit used.

I use just about every free credit monitoring service available, some of which are provided through my credit cards and brokerage accounts. Includes but isn't limited to creditwise, creditkarma, whatever discover is called now, experian, etc. A number of these offer simulators and other methods to gauge how certain decisions may affect my credit.

In short, a new personal loan(including inquiries, impact to avg acct age, etc.) and paying off all of my credit card debt may bump my score roughly 70 points, an amount that may otherwise take me over 6 months to achieve if I were to simply try to pay off my CC debts aggressively. The personal loan terms are viable and the short-term credit score benefit seems to (on the surface) improve my lender options in a way that may make more sense for my overall strategy. The APR on the personal loan is lower than some of my CCs as well, and would not charge more interest.

I know credit score isn't everything though so I looked and my overall DTI will be LOWER with the new loan as the single monthly payment will actually be less than my current cc bills per my credit report.

The short-term benefits of the FICO score increase seemingly make me a better borrower on paper, but what kind of red flag is the recent personal loan? I should also note that my new credit score may satisfy certain lenders overlay x that the old score did not - it is upwards of 70pt swing based on conservative estimates. I think it matter so I will mention that the net debt of my credit card accounts (or personal loan in the future) is ~3% of my total debt after my current mortgage and car loan. (my car loan is less than 3% of my total debt)

Any insight or personal experiences here are greatly appreciated.

[Brenna ODonnell]

Hey Zach - LO at a mortgage company here. Ben is correct in that lenders will generally only use FICO 2 /5 / 4 for Experian / Equifax / TransUnion respectively. The credit bureaus make it next to impossible for you to view these scores on your own without a lender. As a quick rule of thumb - You'll generally see an improvement in your pricing with every 20 points you gain (Ex. 700-719, 720-739, 740+) .

The personal loan will likely cause an initial drop in your scores since I'm guessing the CU just ran your credit, then you'll have an additional hard hit with the personal loan. Not sure what your credit utilization is at right now, but if you're high, somewhere over 30%, and then pay everything off and get to 0% from the personal loan, you will definitely see a jump in your scores once the CC companies report to the credit bureaus. But this won't happen overnight.

It's tough to give actionable advice here without knowing your full DTI / Credit scenario, but overall, I'd recommend just thinking about your ideal timeline and not relying on an immediate improvement to your scores from the personal loan. If you're looking to make the purchase ASAP, I'd hold off on the personal loan. Lenders can re-run your credit up to 3 times while you're in process, so if you open a new account AFTER you get an accepted offer on a property, it could complicate things in underwriting - especially if you get an initial drop in your scores before the CC companies report that your cards have been paid off. If you're OK with not purchasing immediately and want to improve your overall borrowing profile, then yes - this route could help you achieve more favorable rates and terms once your scores jump back up. An underwriter may ask for an LOX (Letter of Explanation) if you recently opened a new account, but it won't NQ your loan.

Hope this helps!