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I was excited to pay of my auto loan until I got a notification that my credit score had dropped! Why would paying off a 5 year loan hurt my credit instead of helping it?
FICO loves it when you pay off credit cards. The more cards reporting $0 the better, and also the lower your overall utilization percentage, the better. (As long as you have one card somewhere reporting a small positive balance.)
So you'd think the same thing would apply for installment loans, right? But surprisingly, that's not how it works.
For installment debt, FICO likes it (especially the latest FICO models, like FICO 8) when you have at least one open loan that also involve a lot of the principal paid off. When a loan goes from being mostly paid off to closed, you lose that extra reward, and it can translate into a substantial score hit if the loan that was just paid off was your ONLY installment loan.
Was your car loan your only installment loan? (No student loans, no mortgage, etc?) And before you paid it off, was it mostly paid off?
PS. We can suggest a pretty easy fix to your problem. A cheap way to make FICO give you the benefit of a mostly paid off installment loan.
This is a pretty common topic so don't overlook prior threads as a resource:
All debts are not the same and therefore different types of debt are evaluated differently. Installments like an auto loan are considered much less risky than revolving credit card debt. You were receiving a scoring benefit from having the active installment. Once you paid it off you're no longer subject to that benefit.
@Anonymous wrote:Why would paying off a 5 year loan hurt my credit instead of helping it?
It's not all hurt. It will still factor into your AAoA until it falls off your reports.