I paid off my auto loan 2 years early and my credi... - myFICO® Forums

Anonymous · ‎04-10-2015

I wanted to get a new auto loan, I saved my money and paid off my current loan roughly two years early. After the pay off my credit score dropped 20 points, this doesn't seem right, I thought this would of been a good thing.

Anonymous · ‎04-10-2015

It is normal - but stupid - for the score to drop when an installment loan is paid off. It's part of the Fico scoring algorithm.

Imhotrodcrazy · ‎04-10-2015

@Anonymous wrote:
I wanted to get a new auto loan, I saved my money and paid off my current loan roughly two years early. After the pay off my credit score dropped 20 points, this doesn't seem right, I thought this would of been a good thing.

Things like this just irritate the hell out of me. We should be awarded, not penalized for paying off a bill. Congrats to you for paying off your loan.

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Anonymous · ‎04-10-2015

I am sorry you experienced the point drop. Auto Loans are a curious thing. In fact, most loans are - including mortgages as we learned from the recent credit crisis. Auto Loans take on a life that your servicer and bank don't really share with you. They become part of a whole other type of loan structure - collateralized debt obligations. These are a collection of various debt products fit into one large debt product that is then sold as a "fixed income security." By paying off your installment loan BEFORE the final date, you've taken your debt out of that greater pool.

The deduction may not be because you paid your debt ahead of time. Companies like to know that you are responsible with money and can pay back your debts. The problem I see is that you paid it off OUTSIDE of the agreement. Instead of paying off your debt in the time both you and the lender agreed, you paid it off sooner. Now your loan cannot be used in the way I mentioned above.

I'm curious about the terms of your loan: were there any prepayment penalties/fees that you had to pay since you paid your loan off so quickly?

I know my explanation is somewhat twisted. But realize the problem is that you've turned yourself into an unreliable income stream by paying it sooner than the originally established and agreed upon loan term. Instead of having your debt for 48 months, they've only had it for 24. Now they have to go and find something to REPLACE your debt because the lender was dependent on YOUR income stream from your loan.

I hope this makes sense.

Anonymous · ‎04-10-2015

Completely normal. I do not recall the exact number but I dropped 30-40 points when I paid off my car loan. Sucks to be penalized for not being in debt, but I would gladly trade the point drop if it meant I get to keep $700 in my bank account every month.

takeshi74 · ‎04-11-2015

@Anonymous wrote:
After the pay off my credit score dropped 20 points, this doesn't seem right, I thought this would of been a good thing.

That's typical. Never rely on assumption. Installments are not considered to be the same risk as revolvers. This isn't the most common topic around here but has been brought up in prior discussions. There are a number of other resources that you can refer to on this matter as well. Also keep in mind that mix of credit is a scoring factor as well and that you had been receiving the scoring benefit of having the auto loan.

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

@Imhotrodcrazy wrote:
Things like this just irritate the hell out of me. We should be awarded, not penalized for paying off a bill. Congrats to you for paying off your loan.

It's all a matter of risk assessment for the creditors -- not rewarding or punishing consumers. Again, risk on an installment is assessed differently. Make sure you read up and understand how all this works instead of relying how you think things should work or else you'll constantly run into confusion and frustration. Keep in mind that the actual customers of the CRA's and FICO are the creditors (again, for risk assessment) even though both do make money off of consumers.

I'm not arguing whether this is "right" or "wrong". It is what it is and everyone is subject to the same system. Plenty are able to have good and excellent credit scores despite this. If 20 points kills your scores then you might want to work on the other factors that you can do something about. Or not obsess over the numbers.

@Anonymous wrote:
I know my explanation is somewhat twisted. But realize the problem is that you've turned yourself into an unreliable income stream by paying it sooner than the originally established and agreed upon loan term. Instead of having your debt for 48 months, they've only had it for 24. Now they have to go and find something to REPLACE your debt because the lender was dependent on YOUR income stream from your loan.

While that may play into a particualr creditor's assessment it is not relevant for FICO scoring purposes.

jbsea · ‎04-11-2015

The reason you lost points is because you no longer have the credit mix. it is only 10% of your credit scored but as you can see 10% is a lot when your watching. It has nothing to do with paying off early or anything like that. this is just a dumb thing that fico does. But congrats on your payoff. Whoever you had your loan though.... there internal scoring will love you for that.

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Anonymous · ‎04-11-2015

I wasn't penalized when I paid the loan off. I don't know the details of the loan agreement, only the basics of it.

It sucks though, I was trying to raise my score to get a house loan by the end of the year. Well it is what it is I guess.

Thanks everyone for your feedback.

Anonymous · ‎04-11-2015

@Anonymous wrote:
I wasn't penalized when I paid the loan off. I don't know the details of the loan agreement, only the basics of it.
It sucks though, I was trying to raise my score to get a house loan by the end of the year. Well it is what it is I guess.
Thanks everyone for your feedback.

The positive side of that is that by paying off the loan your debt to income ratio improved, and that's one of the factors considered in mortgage lending.

9CLINE · ‎04-11-2015

Yep, I know how you feel, went thru the same situation myself.. I learned and understand why the score drops..it's just strange to see a payoff hurt ya...Still to me at least it was worth it not to have the payment anymore...lol.... debt free is worth it,,I did notice my score inched back up to where it had been may be time or bucketing ...

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