Decline in FICO score after financial improvements

[FCCguy]

I refinanced my house last summer.  Prior to that my FICO score was 717.  I had a first mortage of $170,000 and a second of $29,000.  My combined interest rate was between 8 and 9 percent but the first mortage was about 6.74 percent.  My monthly house payment was about $1,450.00.  Despite the economy the appraisal value of my house dropped just a few thousand, but that was offset by the fact I had just put on a new roof.  I have not been late on that payment  on any other payment.  I am now seven months past the new loan.

When I refinanced, I put in a substantial amount of cash and ended up with a single mortgage of 5.5 percent and a monthly house payment of just over $1,200.  I did have to go to mortgage protection for six years.  So, my house payment dropped by several hundred dollars and the equity in my house improved by over $25,000.  Shortly thereafter my score dropped to 705.  Makes me wonder if I paid off my house mortgage entirely my score would drop to below 500.  What gives with this?  Seems my financial picture improved greatly by the refinance, but my FICO decreased.  It dropped to 704 when I paid off a credit card (the balance was less than $200, but that was the stated reason for the decline).  I do not understand how these scores work.   I have now been paying weekly, which means I am constantly reducing principal, yet I keep going down.

[MarineVietVet]

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@FCCguy wrote:

I refinanced my house last summer.  Prior to that my FICO score was 717.  I had a first mortage of $170,000 and a second of $29,000.  My combined interest rate was between 8 and 9 percent but the first mortage was about 6.74 percent.  My monthly house payment was about $1,450.00.  Despite the economy the appraisal value of my house dropped just a few thousand, but that was offset by the fact I had just put on a new roof.  I have not been late on that payment  on any other payment.  I am now seven months past the new loan.

When I refinanced, I put in a substantial amount of cash and ended up with a single mortgage of 5.5 percent and a monthly house payment of just over $1,200.  I did have to go to mortgage protection for six years.  So, my house payment dropped by several hundred dollars and the equity in my house improved by over $25,000.  Shortly thereafter my score dropped to 705.  Makes me wonder if I paid off my house mortgage entirely my score would drop to below 500.  What gives with this?  Seems my financial picture improved greatly by the refinance, but my FICO decreased.  It dropped to 704 when I paid off a credit card (the balance was less than $200, but that was the stated reason for the decline).  I do not understand how these scores work.   I have now been paying weekly, which means I am constantly reducing principal, yet I keep going down.

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Hello and welcome to the forums.

Your financial health should always be your #1 priority not a score. I suspect the slight drop was caused by the application for the refinance and new credit reporting. After a year it won't be considered a "new" loan anymore and you should rebound from this.

Keep paying everything on time. That's the best thing you can do to help yourself.

Of course a score is important and should not be ignored but IMO it's just another tool to help us save money.

From a BK years ago to:
7/09 TU-742 EQ- 779
8/09 TU-765 EQ- 783
9/09 EX pulled by lender 802

You can do the same thing with hard work

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[Jazzzy]

As MVV said, your score will rebound. Right now you are losing some points for having a new loan, which also dropped your average of accounts (AAoA). Plus, you had an inquiry for that loan, which may have cost a few points.

You did the right thing with the refinance and by paying down more equity.

As for the credit card, how many cards do you have? Is it just the one? If so, FICO probably doesn't like seeing a balance on it. I don't know where you got the reason for the score decline, but the reasons often are not on point. It's likely a combination of things, including the new account and the inquiry for that account.

[FCCguy]

I have four credit cards, all with a current balance of $0.  I have one small-balance card that I like to use when purchasing on the internet.  The credit limit is $600.  All the others are $2,000 or greater.  The $600 card is a Capitol One card that does not report credit limits, but rather high balance.  I don't think I have ever hit $400 on it but have always paid it to $0 every month.  It got a little over $200 at Christmas, which was long paid off before this one-point drop in score.  The FICO service specifially mentioned this card.  I suspect it appeared that I was over two-thirds of my credit limit;  and score reporting always seems to be slower than I expect.  So I don't think FICO has discovered that balance is once again $0.  I have some difficulty with the "one size fits all" theory and therefore question any finding that I am in decline because of a credit card balance of slightly over $200, regardless of the credit limit.

[RobertEG]

FICO is not intended to be an evaluation of your financial strenght.  It know little of your current financial status.

A millionaire may just as, or even more likely, to default on payments as Joe Blow.

When you refinanced, you added a new TL, which resulted in a short-term lowering of your AAoA.

FICO does not put heavy weight on balances owed on installment loans.  Having a $100,000 balance and 90% util on a mortgage loan has no where near the impact, for example, of a $5,000 balance and 80% util on a revolving (CC) account.

FICO knows that most consumers pay their installment loans first in order to prevent foreclosure or repossession of real property.

REvolving credit is much riskier for a lendor, for it is secured only by your account agreement promise to pay, and is the most likely, if bad times hit, not to be paid timely.You show lower risk in revolving credit by keeping balances/%util low, and showing years of timely payment history.

Look at FICO, not as an evaluation of financial security, but as a scoring of your risk of paying timely.