Paid off car loan - FICO dropped. Got a new car loan - FICO dropped. Huh?

[Nyrell]

I subscribe to all 3 FICO scores.  In May, I paid off my car loan and my scores dropped on EX and EQ by 14 points each.

In July, I took out a new car loan and my scores dropped another 11 points!   At the same time my utlization dropped to 0% for the first time ever.

Anyone have any insight to this insanity?  

Thanks!

[pipeguy]

Scoring is based on a mix of credit products utilized, revolving, installment and long term installment such as a Mortgage. Best scoring results will be when you have all three and carry a balance on all three because it's based on current status in addition to other factors. By paying off your car loan (installment) you have a history of a paid loan, but NO utilization for installment which means it doesn't get scored. By pay off your revolving accounts - same thing.

Very(!) simple example using a 3 point score 1=poor or bad, 2 = good, 3 = perfect. Obviously its more complex.

Revolving currently "perfect" = 3

Mortgage = perfect = 3

Installment = 0 because you have none

3+3+0 / 3 = 2 which would be the middle  "good"  rating.

By paying off you installment you got a 0, by paying off all revolving you got another 0 so 0+0+3 /3 = 1 which is not good as far as scoring.

Again, this is a very simple example and FICO scoring is not as simple, but you'll get some idea.

January 2016 I paid off one of my auto loans which resulted in a 19 point drop, in March I added a car loan for the replacement car and I saw a 14 point increase - I assume the 5 point different is due to higher debt load. However I have a very thick file with a lot of accounts over a lot of years so the overall effect was very little.

You should see a bump up with the new auto loan and if you carry a "reported" small balance on at least one revolving account each month, you'll see another bump up. 

Bottom line to remember is your one day/week/month score is not that important unless you are seeking new credit so other than the ego issue, the ups and downs of the scoring models are not really a factor - defaults and lates are a lasting effect, that's very different.

[SouthJamaica]

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@Nyrell wrote:

I subscribe to all 3 FICO scores.  In May, I paid off my car loan and my scores dropped on EX and EQ by 14 points each.

In July, I took out a new car loan and my scores dropped another 11 points!   At the same time my utlization dropped to 0% for the first time ever.

Anyone have any insight to this insanity?  

Thanks!

---

1. When you paid off your car loan, if you had no other installment loans, you lost points for lack of "credit mix".

2. When you took out the new loan you lost points because of high utilization.

3. As you pay down the new car loan your points will come back.

4. By 'utilization' you're apparently referring to credit card utilization. You can get some points there by having one card report a minimal balance, rather than having all cards at zero.

[tjmolly]

Face it, the FICO algorithm does everything in it's power to give the consumer the shaft.  If the "bank" can't see through just a FICO-score when you apply for any form of credit, they lose as they make no money if they don't loan. Period!!! Avoid banks.  I've used P2P lending got phenomenal rates having a >780 FICO and have never bothered with banks. Just my 2-cents worth.  Best of luck!

[surferchris]

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@pipeguy wrote:

Scoring is based on a mix of credit products utilized, revolving, installment and long term installment such as a Mortgage. Best scoring results will be when you have all three and carry a balance on all three because it's based on current status in addition to other factors. By paying off your car loan (installment) you have a history of a paid loan, but NO utilization for installment which means it doesn't get scored. By pay off your revolving accounts - same thing.

Very(!) simple example using a 3 point score 1=poor or bad, 2 = good, 3 = perfect. Obviously its more complex.

Revolving currently "perfect" = 3

Mortgage = perfect = 3

Installment = 0 because you have none

3+3+0 / 3 = 2 which would be the middle  "good"  rating.

By paying off you installment you got a 0, by paying off all revolving you got another 0 so 0+0+3 /3 = 1 which is not good as far as scoring.

Again, this is a very simple example and FICO scoring is not as simple, but you'll get some idea.

January 2016 I paid off one of my auto loans which resulted in a 19 point drop, in March I added a car loan for the replacement car and I saw a 14 point increase - I assume the 5 point different is due to higher debt load. However I have a very thick file with a lot of accounts over a lot of years so the overall effect was very little.

You should see a bump up with the new auto loan and if you carry a "reported" small balance on at least one revolving account each month, you'll see another bump up. 

Bottom line to remember is your one day/week/month score is not that important unless you are seeking new credit so other than the ego issue, the ups and downs of the scoring models are not really a factor - defaults and lates are a lasting effect, that's very different.

---

Good explanation.

[surferchris]

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@SouthJamaica wrote:

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@Nyrell wrote:

I subscribe to all 3 FICO scores.  In May, I paid off my car loan and my scores dropped on EX and EQ by 14 points each.

In July, I took out a new car loan and my scores dropped another 11 points!   At the same time my utlization dropped to 0% for the first time ever.

Anyone have any insight to this insanity?  

Thanks!

---

1. When you paid off your car loan, if you had no other installment loans, you lost points for lack of "credit mix".

2. When you took out the new loan you lost points because of high utilization.

3. As you pay down the new car loan your points will come back.

4. By 'utilization' you're apparently referring to credit card utilization. You can get some points there by having one card report a minimal balance, rather than having all cards at zero.

---

Good explanation.

[SouthJamaica]

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@surferchris wrote:

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@SouthJamaica wrote:

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@Nyrell wrote:

I subscribe to all 3 FICO scores.  In May, I paid off my car loan and my scores dropped on EX and EQ by 14 points each.

In July, I took out a new car loan and my scores dropped another 11 points!   At the same time my utlization dropped to 0% for the first time ever.

Anyone have any insight to this insanity?  

Thanks!

---

1. When you paid off your car loan, if you had no other installment loans, you lost points for lack of "credit mix".

2. When you took out the new loan you lost points because of high utilization.

3. As you pay down the new car loan your points will come back.

4. By 'utilization' you're apparently referring to credit card utilization. You can get some points there by having one card report a minimal balance, rather than having all cards at zero.

---

Good explanation.

---

Thanks

[Nyrell]

You, in fact, are brilliant - PipeGuy.

Instead of paying off all my credit cards I went ahead and retained a 5% balance.   The result was my credit score JUMPING from 701 to 757!!!!!

Who rocks?   PIPEGUY!  

Thank you!

[pipeguy]

Heh.... I can't really take credit for your good payment history, but I'm glad to see my "simple" example helped you stay ahead in the game. 

Just don't yell at me when it drops for some unknown reason....that's my wife's job (yelling at me for unknown reasons) and she's damn good at it  (lots of practice)

[Appleman]

The FICO algorithms are not designed to give people the shaft, they are designed to create profit while balancing the risk and reward of lending to the public. Millions if not billions of data points have made the FICO machine pretty good at determining how a certain credit profile will perform with their credit.

The system can be harsh with the penalties that are applied when a mistep occurs and it can also be gamed. Again, these are just my 2 cents.

Peer to peer lending is great, which lender do you recommend?

I would find it hard to believe that a P2P will have a lower interest rate on a car note as compared to PenFed, DCU etc.