Paid off Loan...Credit Score went Down??

[Anonymous]

Good Morning.
I had a small loan from my credit union, I just paid it off and the CU reported to the credit agencies that my loan was paid in full, no late or missed payments.
In fact, I paid it off a bit early. Now, I get an alert that my score has gone down as a result of this reporting. How can that be possible? Will it bounce back? 

Thank you!

[Anonymous]

Someone JUST ASKED this question earlier and it gets asked about once a week.

FICO requires that you have an open installment loan reporing of ANY KIND (mortgage, personal, auto, student).  If you pay off your only loan, your score will drop up to 20 points.

If you have no need for a new loan otherwise, do the Alliant SSL trick -- costs you only a few bucks in interest over 5 years reporting and will bounce your score back up in 1-2 months.

Also note that if you pay off all your credit cards to $0, you will also get hit with up to 20 points FICO drop.  You always want an open installment loan, and you always want ONE credit card (but not more) reporting at least $3 every month for maximum FICO boost.

[Anonymous]

Nice reply by ABCD.  This link will tell you all you need to know about the SS loan trick:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

You only need to read the first 2-3 posts.  And post #2 will walk you through the details of how FICO scores installment loans.

[Shogun]

If that was your only installment loan then you took a hit on your mix of credit.  It's no big deal, your scores can continue to grow with revolving accounts.

[Anonymous]

CGID, we've really got to get that most common thread topics sticky going that we PM'd about a few times a while back.

[HeavenOhio]

I wouldn't go so far as to say an open installment loan is required. But it does help one's score when it's mostly paid down. We don't know the OP's scores, but it could be that they're still fine. If they're not so fine, the SSL method mentioned above would bring the points back within a few weeks.

As others are saying, a big problem is that people are taken by surprise. If they knew their score was going to slide, it'd make a big difference. They'd either be mentally prepared to accept it or they could take steps to avoid it.

[Anonymous]

CGID, 

Thanks for reminding me. My only installment loan (car loan) is on schedule to be paid off by end of summer (4 years early ) I'm most likely going to do the Alliant trick. Are they still doing a soft pull? 

[Anonymous]

Applied in May 2017, soft pull.

[Anonymous]

Very true above, HeavenOhio.  The problem as I see it, as evidenced by the fact that a thread is started about every other day on the topic, is that people don't understand that paying off your only installment loan hurts FICO scores, as does reporting all $0 balances on your credit cards.  I'd say these two topics are just about the most common and are constantly catching people by surprise with their FICO score drops when they think they're doing "the right thing" by paying something off.

[Revelate]

Taking a step back and looking at this from a completely different (moderator and community) angle:

What an opportunity to give a welcoming, well reasoned, friendly response, and maybe add folks to the community.

If y'all want to make some sort of FAQ thread, if it's useful and clear I'm all for stickying it to see if it reduces the incidence rate of repeated questions; however, taking exception to people being suprised by something that is simply not well known by the general populace, or by the fact the question gets asked repeatedly here, meh.  That's the Intarwebz.

Before my thread from 2015, installment utilization and needing to have an open installment line at a pretty balance for optimal scoring was a "Here be dragons" like myth; FICO 8 was released 7 years prior and we only just found out about that and that information was nowhere else on the net at the time?  People on this forum scoffed at the idea back then, random Sally consumer, how could they possibly know?  The fact myFICO comes up first on Google, we're going to get new folks over time.

Everyone was new at some point, that's not a problem; actually, I'd suggest it's a very very good thing.