Paid off auto loan and credit score dropped 40 points!

[guf]

I had a VW diesel that was bought back and paid off. It was only 8000$ of a 20k orginal loan. I was never late on a payment. I was suprised to get a notification today that my score drasticly dropped because of this being paid off.  Any thoughts?

[SouthJamaica]

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@guf wrote:

I had a VW diesel that was bought back and paid off. It was only 8000$ of a 20k orginal loan. I was never late on a payment. I was suprised to get a notification today that my score drasticly dropped because of this being paid off.  Any thoughts?

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If it was your only installment loan, FICO 8 penalized you for no longer having an open installment loan.

If that's what happened, a way to get those points back without actually getting into debt is as follows:

Join Alliant Credit Union, take out a $500+ savings account, take out a $500 share secured loan secured by the savings account with a 48 or 60 month term, decline or cancel autopay, transfer $455 from the savings account towards the loan balance bringing the balance down to $45. Pay that off slowly over the balance of the term. Once that reports the positive effects will be felt.  On the downside, you will be getting a new account, which has a slightly negative effect on your scores.

[guf]

Thaks for your reply. I do  have another car lease agreement starting soon so hopefully that will catch up and help. 

[jamie123]

Yes, a lease agreement will work the same as an installment loan.

[Anonymous]

The lease will work, but it will start at 100% utilization so it will take some time to get back all of those installment loan points.  You'd probably get back half or so just from getting the installment loan reported to your file, then the points would slowly go up over time as thresholds are crossed (70%, possibly 50%, etc)

[nupey10]

I refi'd my autol loan back in Oct '16 and my scores dropped once the closed account reported.  Freaked me out.

In about 2 months Jan'17 after the new loan reported all my scores recovered beyond where they dropped.

Be patient those scores should recover.

[Anonymous]

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@nupey10 wrote:

I refi'd my autol loan back in Oct '16 and my scores dropped once the closed account reported.  Freaked me out.

In about 2 months Jan'17 after the new loan reported all my scores recovered beyond where they dropped.

Be patient those scores should recover.

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Hi Nupey.  When you did the re-fi, my guess is that you still owed most of the balance on your auto loan.  Thus, your total installation (just before the re-fi) might have been 82% (say) and then after the new loan appeared it was at 100%.  That's consistent with the possibility of someone getting all his points back.

But our OP, in contrast, had paid off most of his loan just before he did his final big payoff.  Therefore he will be going from a TIU of 40% (just before payoff) to 100% (when the new lease reports)  In that case, he may not instantly get his points back, but rather he may have to wait until he has paid off more than half of the lease.

[nupey10]

CGnDixie -  Thanks for the explanation.   I see what you're saying.  Trying to figure out Fico scoring at time is like trying to get out of a Labyrinth

[Anonymous]

I am planning to buy a new car within the next couple of months and will be financing some of the cost.  I will need to buy another car in about a year so I want to try to manage the impact the first loan has on my credit score.  For the near term purchase, I will have a trade-in and planned to add some cash so that the loan would only be about 35% of the purchase price of the car.  Would it be better for my credit score if I held back the cash until after getting the loan and then made an addiitonal payment to the principal to bring the balance down?

[Anonymous]

Do you currently have an open loan on your credit report?  If so, adding another is just going to raise your installment loan utilization.  What matters here is your overall installment loan utilization both before/after the new loan reports.  Most say that the biggest score bump comes with overall installment loan utilization goes below 8.9%.  That being said, if you have a current loan that's at >8.9% utilization present, you'd likely lose very little in adding another loan.  If you are below 8.9% on a current loan, adding one could cause your scores to drop say 15-20 points.  If you don't have an open loan, you're already experiencing a penalty for no open installment loan, so adding one even at 100% utilization is usually a good thing and your score may not change much at all.