17 point drop after mortgage payoff, really?

[itpromike]

So I just refinanced my mortgage with lower interest rate and lower payments. The new mortgage account posted to my report and no problems however the previous loan just posted as paid in full and my score dropped 17 points from 821 to 804 on Exp and I'm sure the other 2 aren't far behind it and will probably follow suit and drop as well. What gives? Really disappointed- I was aiming for 840 across the board this year. Ugh!

[elim]

Flawed scoring system.  There should be historical data included to benefit from PIF'd loans (they have no problem scoring closed collection accounts), or a code to transfer the original limit to the refi'd loan for scoring purposes only (to avoid the 100% installment utilization).  If your credit has improved enough to be eligible for a better rate, why should you be penalized? It makes me wonder if some of these idiots aren't in the pockets of big banks because when a loan is paid off, many are primed for a new one (at a higher rate).

Same thing happens to refi'd auto loans.   Sux

[Anonymous]

The key (as Elim explains) is this thing we call Installment Utilization.  It's calculated in a similar way to CC utilization.  Basically you look at how much you currently owe on your open installment loans.  Then you divide that by your combined credit limit for the same loans (i.e. for I-loans the analogue is the combined original amount of your loans).  That gives a percentage. 

Suppose your installment utilization was at 68% before the payoff.  Now that loan is closed and your installment U is 100% (because the util calculation only considers open accounts).

FICO likes a low installment util but not 0%, which like it reacts toward CC utilization.

Future models will do better at getting this, since the CRAs are collecting historical data now on balances and payments.  But right now the util factor is used by the most commonly used FICO 8 models.

Good news of course is that there is no real practical concern for you.  You are still well  over 800, so no lender or card issuer will care.

[newhis]

So, in this case, both loans are reporting, the original closed and the new one at 100% or close to it, right?

From what I read the scores used for mortgage may not change as much and more than 800 FICO will give you the best rates anyway.

I do prefer having a mortgage with lower rate and saving money with FICO 800 than, 840 paying more. As you pay down your loan your score will go up. The only other thing you can do is let only 1 card report a low balance and $0 the rest.

[StartingOver10]

OP, for mortgage scores, the top tier is >760 so you are well into the top tier and have nothing to worry about. The 800+ score gives you bragging rights, but it isn't necessary to have to get the best rates. Your mortgage scores are fine where they are now

[Anonymous]

Another factor that I'm sure isn't included in FICO scoring with respect to mortgage refinances outside of installment loan utilization is the element of time.  Someone who has a coventional 30 year mortgage paid down to 60-something percent could be some 10 years into that mortgage; They may have 20 years left of payments.  When you refinance, while you obtain a better interest rate and lower monthly payment you also start back not only with a loan at 100% utilization, but also another 30 year loan.  The risk associated with having to pay a loan for 50% longer (30 years verses 20 years) is going to be greater as it allows more time for something to go wrong that could prevent one from being able to continue making payments.  While I'm 100% certain that FICO scoring doesn't account for this length of time element, it does make some sense and can sort of justify to some degree the score loss in going to a loan now at 100% utilization.

[elim]

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@Anonymous wrote:

Another factor that I'm sure isn't included in FICO scoring with respect to mortgage refinances outside of installment loan utilization is the element of time.  Someone who has a coventional 30 year mortgage paid down to 60-something percent could be some 10 years into that mortgage; They may have 20 years left of payments.  When you refinance, while you obtain a better interest rate and lower monthly payment you also start back not only with a loan at 100% utilization, but also another 30 year loan.  The risk associated with having to pay a loan for 50% longer (30 years verses 20 years) is going to be greater as it allows more time for something to go wrong that could prevent one from being able to continue making payments.  While I'm 100% certain that FICO scoring doesn't account for this length of time element, it does make some sense and can sort of justify to some degree the score loss in going to a loan now at 100% utilization.

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  With this approach,.. If I refi'd to a 15yr I should get a nice bump.  Fico = simple and idiotic. I wrote (and made $$$ with) poker bots for years (I have both approved and banned software listed on both pokerstars.com and fulltilt) and could do a better job.

[Anonymous]

I don't know about a "nice" bump.  I think it would simply be less of a "loss" really.  Installment loans from what I've seen are worth about 30 points.  That is, having an installment loan close to being paid off verses not having one on your report.  Therefore, any steps across thresholds in an installment loan by definition will only be a portion of those 30 points, that is, rather insignificant. 

I agree that a 15 year fixed rate mortgage is less risky than a 30 year fixed rate mortgage based on it being half the number of years that the lender is assuming risk but that FICO scoring doesn't account for this.  I don't however think that the point differential if this were factored in would be wildly significant.  Say you dropped from a 30 year mortgage at 65% utilization to a 15 year mortgage at 100% utilization through a refinance, instead of losing 17 points at best one would think about half of those points could be taken back.  8-9 points, IMO, really isn't all too significant.  Of course this is all speculation for conversation purposes

[itpromike]

Thanks everyone for your responses! I understand what you all are saying and the examples make sense - it's just super dissapointing to see such a drop in my score. My credit score matters a lot to me and I've come from the low 6's to the 800's in only a few years but it took work and I just hate to see that work erased by getting a better loan product.

[Anonymous]

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@itpromike wrote:

Thanks everyone for your responses! I understand what you all are saying and the examples make sense - it's just super dissapointing to see such a drop in my score. My credit score matters a lot to me and I've come from the low 6's to the 800's in only a few years but it took work and I just hate to see that work erased by getting a better loan product.

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Don't look at it that way.  Any score from about 760-850 is essentially equal in terms of being able to acquire credit at the most favorable terms.  Anyone in the 800's has plenty of wiggle room; they could open up a new loan, go on a spree and open up 4-5 more revolvers, probably max out a credit card, etc. and their scores won't drop below 760; their scores will still be in the "ideal" range.