Most people with existing loans have seen something like “proportion of loan balances to loan amounts is too high” on their credit report at some point, and most of the time they have no idea what it means or how to remove it. This is a post you don’t want to miss if it sounds all too familiar.
You have a high loan utilization rate if the loan amounts to balances ratio is too high. To determine how much you owe on an installment loan, the loan utilization rate compares the outstanding balance to the principal amount of the loan. You can lower it by paying down your loan.
Continue reading to learn more about this rate, how it’s determined, what causes the aforementioned statement to appear on your credit report, and how to remove it.
What Does “Proportion of Loan Balances To Loan Amounts Is Too High” Mean?
This reason code typically appears as one of the major determinants of your score, with a red downward arrow indicating that it has a negative impact. Your overall installment loan utilization rate—a term you should be familiar with when the aforementioned statement appears on your credit report—is determined by the ratio of loan balances to loan amounts. It’s one of many reasons to avoid student loans.
Your mortgaged and non-mortgaged installment loans’ outstanding balances are compared to the initial loan amounts to determine your installment loan utilization rate. You can calculate this ratio as a percentage by dividing your outstanding loan balance by the total loan amount. Lenders typically use this percentage to determine your creditworthiness because it essentially evaluates how much you still owe on your installment loans.
When you first apply for an installment loan, your loan balance will likely be high because you haven’t made much progress toward paying it off. High loan balances are typically a result of alluring offers from online merchant credit cards with guaranteed approval. Every payment you make reduces the loan balance, which lowers how much of the loan balance is compared to the initial loan amount. In other words, if your credit report shows that this ratio is high, it simply means that your loan balances are high relative to their initial amounts.
You might have low balances in your banking accounts if you have high loan balances. When you try to make purchases as a result, your debit card may be declined.
The installment loan utilization rate is similar to another ratio that most people with credit cards are familiar with or have at least heard about: the credit utilization rate. Also known as the credit utilization ratio, your credit utilization rate results from the total of the revolving line of credit you’re using and divided by how much available credit you currently have.
It is typically expressed as a percentage and is simply the amount you owe divided by your current credit limit.
Many people wonder whether canceling a credit card will stop recurring fees, but the truth is that the remaining balance must be paid, which will worsen your credit utilization.
For installment loans and revolving credit utilization rates, a higher value indicates a higher risk for lenders and can lower your credit score. Additionally, calculations for both rates are classified under the “amounts owed” credit scoring category, accounting for up to 30% of your overall credit score.
However, despite the similarity of both rates, there are a few minor variations in how they affect your credit score. For instance, a high loan balance to loan amount ratio does much less damage to your credit score than a comparable revolving credit utilization rate, provided you have a good track record of repaying credit card debt. That is why individuals with scores over 700 may exist despite having a high rate of installment loan utilisation.
Disadvantages of High Loan Balances to Loan Amounts
High loan balances to loan amounts have the following drawbacks:
Understanding how your loan ratios can affect these fees requires understanding how to calculate finance charge amounts on loans:
Additionally, if you have a high loan-to-balance ratio, your interest and finance charges will be higher than they would be with a lower ratio. You’ll have more debt, which means higher monthly payments. If you’re not careful, it could even lead to overspending.
High Risk for Default
Lenders view you as a higher risk of loan default when your ratio of loan balances to loan amounts is high. If they notice that you have a very high proportion of installment loans compared to the total amount you borrowed initially, they might not even approve new ones in some cases. Additionally, some lenders might be compelled to reduce the amount of money they lend you or raise the interest rates on existing loans in order to make up for the assumed increased risk of default.
You must weigh the benefits and drawbacks of other loan types, such as income share agreements.
This is possibly one of the most obvious drawbacks of having a high loan balance to loan amount ratio. It’s more likely that your credit score will be low if this ratio is high. There are methods you can use on your own to raise your credit score.
What Causes “Proportion of Loan Balances To Loan Amounts Is Too High?”
This reason code on your credit score report may be generated for a variety of reasons depending on your financial situation and activity. Even the differences between outstanding balance vs. principal balance on loans can be a cause. Although the reasons may differ, certain factors are frequently to blame, including:
A New Installment Loan
The response “proportion of loan balances to loan amounts is too high” most likely means that you recently obtained a new installment loan. You won’t put much effort into repaying a new loan in the first few months when you take one out. With a short payment history, your balance will remain high, resulting in a high loan balance: loan amount ratio (and the aforementioned reason code on your report)
Let’s look at an illustration to better illustrate how a new loan impacts your loan utilization rate:
Here are the loan utilization rates you had prior to and following the new loan.
Before the loan:
|Loan Type||Loan Amount||Loan Balance||Loan Utilization Rate (loan balance / loan amount multiplied by 100)|
As you can see, your loan’s overall loan utilization rate would have been high 87% before the new loan. Let’s examine how the new loan would affect that now:
|Loan Type||Loan Amount||Loan Balance||Loan Utilization Rate (loan balance / loan amount multiplied by 100)|
|Total||$48,000||$43,000||90% (rounding to nearest whole number)|
As you can see, adding the $10,000 loan increases your loan utilization rate from an already high 80% to a higher 90%, leading to the statement “the ratio of loan balances to loan amounts is too high.” ”.
Low Average Age of Accounts
In some instances, a high proportion of balances to original loan amounts may be caused by the accounts in question having a short average history. You most likely won’t have paid off a large portion of each account’s initial loan amount if it is still relatively new. This implies that you will have a high overall loan utilization rate, which raises the likelihood that you will receive a reason code informing you of a high loan balance to original amounts ratio.
If you haven’t recently taken out a new loan, you can almost be certain that your high loan utilization rate is caused by a low average age of accounts. To be certain, see if the reason code “proportion of loan balances to loan amounts is too high” is accompanied by anything like “length of time accounts have been established.” ”.
Your credit score will suffer if the cause is the short average age of your accounts. Why? Because you’ll fall short in a category that accounts for 15% of your credit score, namely the duration of your credit history.
The average age of your accounts is determined by dividing the total number of months since the start of all of your credit accounts (excluding collections, public records, and inquiries) by the total number of accounts you have.
How To Fix the Code and Improve Your Credit Score
As of now, it has been determined that the phrase “proportion of loan balances to loan amounts is too high” refers to how much of your outstanding loan balance is in comparison to the total amount you originally borrowed.
We’ve also established that this assertion, which only applies to installment loans, is another way of saying that you have a high installment loan utilization ratio. Therefore, we only refer to working on your installment loans to raise your score when we discuss fixing the aforementioned reason code (and raising your credit score as a result).
Understand that installment loans are different from revolving credit. With an installment loan, you borrow a predetermined sum of money. You consent to repay it over a predetermined period through a series of fixed, regular payments (also known as installments).
Popular examples of installment loans include:
However, with revolving credit, you have some control over how much of the available credit you use as well as how and when to make payments. Credit cards are a prime example of revolving credit. Although it is possible to obtain a credit card without a bank account, this wouldn’t qualify as revolving credit.
Let’s look at some of the best ways to improve now that we’re on the same page.
The best ways to deal with a high utilization rate on your installment loans and raise your credit score as a result:
Improve the Average Age of Accounts
This is a great option if the reason code “proportion of Loan Balances to Loan Amounts is Too High” and the statement “length of time accounts have been established” appear on your credit report. It’s also likely the simplest of the solutions we’ll discuss in this section.
Avoid opening any new accounts to raise the average age of your accounts. You’ll eventually start to notice an increase in the average age of your accounts. If you make timely payments, you’ll establish a solid payment history, which will boost your credit score.
Pay Off Your Installment Loan
It makes sense that repaying installment loans can help increase your loan utilization ratio because the reason code “proportion of loan balances to loan amounts” is caused by having a high outstanding loan balance in comparison to the principal amounts. A revolving credit facility is considered such a loan.
But that doesn’t necessarily mean that your credit score will go up. Additionally, some loans have prepayment penalties, so before you decide to pay off your loans early, you should review the terms of your loan. As you might have inferred from the last two sentences, not everyone should pay off an installment loan to reduce their loan utilization ratio.
So who should do it and who shouldn’t?
Paying off your loan in full with some remaining balance to keep the account open is one way to reduce your loan utilization rate while still boosting your credit scores. Your loan utilization rate will decrease in this manner, and you won’t have to give up the benefits that a properly managed installment loan can have on your credit score.
Lower Your Credit Utilization Rate
Although the credit utilization rate and installment loan utilization rate are unrelated, there is a way to use both to raise your credit score. Move your revolving credit debt onto an installment loan since the former rate has a smaller impact on your credit score than the latter.
Even though it will increase your ratio of loan balances to loan amounts and decrease the average of accounts in the short term, doing so will have a positive effect on your credit score. Because it will have a favorable effect on the credit utilization rate, a factor that has a significant impact on your credit score.
Best Ways to Payoff Balances on Installment Loans
You have a variety of options through your bank to think about if you’re trying to pay off the balances on installment loans.
Use a Starter Check
A starter check is a great way to settle installment loan balances if you recently relocated and opened a new bank account.
Consider an Instant Check Cashing Option
Another great option for paying off installment loan balances instantly online is check cashing.
Payments Through Online Banking
Online banking has both benefits and drawbacks, but one benefit is the ability to pay bills and pay off installment loan balances.
Cashier’s or Certified Check
Whether or not you use a cashier’s check vs. It’s imperative to use a certified check when paying off installment loan balances. This will protect you from fraud and mistakes that can happen when dealing with cash, which can be very inconvenient if they occur while you are trying to pay off your installments.
To locate a location to buy money orders, perform a search for “money order near me.” If you don’t have a bank account, this is perfect for you. This option enables you to settle outstanding installment loan balances.
How To Move Your Revolving Credit Debt Onto an Installment Loan
Simple: Get an installment loan and pay off some of your credit card debt with it. Pay off enough of your credit card debt to lower your credit utilization rate to under 30% if you are unable to pay it all off.
We’ve looked at the formula used to calculate your credit utilization ratio, so it’s simple to figure out how much credit card debt you need to pay off to reach this rate. If you don’t remember, it’s the sum of your credit card debt divided by the sum of your credit available, multiplied by 100.
All you have to do is make your credit card debt the formula’s unknown value (let’s call it “X”) and use simple math to work backward from there.
The amount of credit card debt you must maintain to keep your revolving credit utilization rate at (or even below) 30% can be calculated using that number.
In a relatively short amount of time, using an installment loan to pay off high credit card debt will greatly improve your scores. People who do this typically notice improvements in their credit scores within a few months.
Credit Score Benefits of an Installment Loan
Your credit score can increase with an installment loan in two important ways over time. These include:
What Are Debt Consolidation Loans?
You can use installment loans, such as debt consolidation loans, to pay off large amounts of credit card debt and raise your credit score at the same time. This type of personal installment loan is what it sounds like: you take it out specifically to pay off high credit card balances.
A debt consolidation loan can be beneficial for both parties as long as you make your regular payments on time and don’t let your credit utilization rate go above 30%. Keep an eye on your spending and make a personal balance sheet. You’ll gain the long-term advantages of adding a new credit account in good standing to your credit portfolio in addition to a relatively quick boost to your credit score.
Keep in mind that debt consolidation loans aren’t for everyone, and you need to be careful with the evaluation process so that you don’t end up denting your credit score even more. If this type of loan isn’t the best fit for your current financial situation, a credit builder loan can be an option.
What Are Credit Builder Loans?
Installment loans by nature, credit builder loans were created with the express purpose of assisting borrowers with weak or no credit to strengthen their credit histories. When your application for a credit builder loan is approved, the lender places the funds in a savings account. No access is permitted until the loan has been repaid.
How does that help?
First off, by making timely payments, you show that you have the financial discipline needed to manage debt responsibly and establish a good credit history. You can follow these techniques such as:
Improved credit scores, future low loan rates, and other advantages of having high FICO scores come with good credit history.
The credit builder loan’s inherent characteristics are what provide the other advantage. Typically, you pay off the debt and the interest before receiving your money. This implies that at the end of the payment period, in addition to having a history of making payments on time, you’ll also have accumulated a sizeable “savings.” Even better, some creditors might charge interest on these “savings.” ”.
When you don’t want to use your assets or equity as collateral for the loan, an installment loan in trust is advantageous. This is especially beneficial during tough financial times when lenders are reluctant to extend credit because of alleged risks.
It’s also advantageous for real estate investors, who might not get the full value of the asset in the event of a default. You can use a property as collateral for an installment loan in trust to get the money you need without having to risk losing the value of the asset.
Finally, for those who are self-employed or who do not otherwise possess tangible assets of significant value, an installment loan in trust may occasionally be preferable to a personal guarantee.
How Many People Have an 850 Credit Score?
One of the highest FICO scores available, 850 is typically good enough for approval of a mortgage loan. To put things in perspective, having an 850 credit score will typically place you among the top 1% to 10% of all credit-active consumers. These are individuals who have built excellent credit histories over a long period of time by paying their bills on time and maintaining a minimal level of credit utilization.
Are Loans to Improve Credit Scores a Good Idea?
Loans to raise credit scores are offered, but they aren’t always the best choice. The ability to extend the time before your next bill is due is the loan’s main benefit. You can repay the loan plus interest with some self-control before the joint account is subject to further fees.
However, sometimes this approach may backfire. If you allow the balance to increase and don’t make payments on time, your rating will probably decline once more. Additionally, even though the initial loan typically carries a low interest rate (in comparison to card balances), additional loans may be harmful. Late payments on loans can result in astronomical fees and a credit rating downgrade.
That does it for today’s discussion. If the phrase “proportion of loan balances to loan amounts is too high” appears on your credit report, hopefully you now understand what it means and will take advantage of the suggestions we’ve provided above to address it and raise your credit score. If things become too difficult, weigh the benefits and drawbacks of consulting an expert and hiring an accountant.
What does proportion of balances to credit limits mean?
A balance-to-limit ratio measures how much credit is being used compared to how much credit is overall available to a borrower. This rate reveals to prospective lenders how much debt a person has and how much of their available credit they are actually using.
What does loan balance to loan amount mean?
You still have to make payments on the mortgage principal according to the loan balance. The loan balance is determined by subtracting the initial mortgage balance from the sum of your principal payments. Knowing the balance on your loan is important.
How do you fix the proportion of balances to credit limits on bank national revolving or other revolving accounts is too high?
Paying down the revolving balances is the only way to address the issue of having too many of them. Your credit scores would likely suffer if you closed open accounts or reduced the credit limits on existing accounts because you would have less credit available. It’s beneficial for your credit to keep your credit cards open and active.
What does utilization on loans too high mean?
Lenders evaluate your creditworthiness based on your credit usage ratio. If your ratio is excessively high, it appears that you rely too heavily on your credit. This may cause lenders to be less willing to give you a loan because they may doubt your ability to repay it.