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Paying off my car loan ruined my credit. Score dropped 70+ points.

Valued Contributor

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.


my-own-fico wrote:

 

Monthly payments aren't even required; all you need is an open loan, preferably with a small remainder. I have prepaid my present car loan into the middle of the final month and am comfortable doing nothing between now and then. Actually then included, as the last transaction is taken care of automatically, lol.

 


 

Then has become now. The scheduled last payment took place, and my FICO 08 for EQ dropped 25 points.

 

New Member

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.

I just made and over $25,000.00 payment to pay off my truck. My FICO score dropped 6 pts. I'm punished for paying off $25,000,00 if debt????? What's up with that????

Starting Score: 650
Current Score: 709
Goal Score: 750


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New Member

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.

Last night I payed off 4 cards and down 2 others which I will pay off with my tax return next week. What kind of punishment will I receive for that. Leaves me with s car loan. A student loan. A loan for replacement of central heat and air and maybe 4 more credit cards ( those 3 will also be paid off within the month). Why do I get punished for eliminating debt?

Starting Score: 650
Current Score: 709
Goal Score: 750


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Regular Contributor

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.


nurseterry44 wrote:

I just made an over $25,000.00 payment to pay off my truck. My FICO score dropped 6 pts. I'm punished for paying off $25,000,00 if debt????? What's up with that????

...

Last night I payed off 4 cards and down 2 others which I will pay off with my tax return next week. What kind of punishment will I receive for that. Leaves me with s car loan. A student loan. A loan for replacement of central heat and air and maybe 4 more credit cards ( those 3 will also be paid off within the month). Why do I get punished for eliminating debt?

 

A six point drop isn't bad for paying off a car loan. Having another car loan and or installment loan likely saved you from a much bigger drop.

 

It's hard to say how your score will change from the other items you mentioned but my guess would be that it would go up slighly due to a big drop in your UTIL but It depend on a lot of factors. Just make sure to always allow at least one card to report a balance each month. Having zero cards report a balance always gets me a 20 to 30 point drop although it comes right back the next month when I let one report again.

 

I know it feels like you're being punished for repaying debt but these scores are computer generated based on a snapshot of your current credit file. The technical definition of a FICO score is something like "what is the chance this person will be late on or miss a payment in the next 90 days." The reason for the drop is that according to their statistics people who have one less loan, for reasons unknown, have a slightly higher chance of missing a payment. People who have gone from having one open auto or installment loan to not having any have an even bigger chance of missing a payment.

 

This is all statistical stuff based on 10s of millions of data points in their records so it's not about you specifically it's just what the statistics say about what people with similar files to yours have done in the past. I know it seems completely unfair, and it is because you haven't done anything negative, but the FICO score measures the lenders risk and history tells them that your situaltion is now a very slightly higher risk than it was a short time ago even though you have personally improved your situation. Time is your friend on this. The older you average age of accounts is and the older your oldest open account are the higher your score gets and the less chance changes like this have of affecting your score.

New Visitor

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.

Why does paying off car loan or other debt drop your score so significantly.  I agree with much of what has been posted on this forum.  I can only speak for myself, but I paid off my car loan last month, as well as my remaining credit card debt, and my FICO score went down 45 points. What??  There were no other changes, no late payments, no inquiries, no new lines of credit, nothing.  I just don't understand why paying down debt would lower one's score so dramatically.  I understand the overall credit mix and the credit utilization factor, but come on, a 45 point decrease for paying off debt.  My score was 729 before the drop.  Can somebody help me to understand this?  Thanks!

Super Contributor

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.


MM73 wrote:

Why does paying off car loan or other debt drop your score so significantly.  I agree with much of what has been posted on this forum.  I can only speak for myself, but I paid off my car loan last month, as well as my remaining credit card debt, and my FICO score went down 45 points. What??  There were no other changes, no late payments, no inquiries, no new lines of credit, nothing.  I just don't understand why paying down debt would lower one's score so dramatically.  I understand the overall credit mix and the credit utilization factor, but come on, a 45 point decrease for paying off debt.  My score was 729 before the drop.  Can somebody help me to understand this?  Thanks!


I'm going to respectfully reserve those vital important answers for you to the guru's in here, but it basically boils down to the way that this SYSTEM is set up and it's RULES.

 

No matter how responsible that you are in paying down and paying off your debt, if you skip over following certain RULES of this SYSTEM they will dock points from off your FICO Credit Score number.

 

You are however in the perfect part of this forum to discover the WHY and HOW Smiley Happy

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Re: Paying off my car loan ruined my credit. Score dropped 70+ points.


MM73 wrote:

Why does paying off car loan or other debt drop your score so significantly.  I agree with much of what has been posted on this forum.  I can only speak for myself, but I paid off my car loan last month, as well as my remaining credit card debt, and my FICO score went down 45 points. What??  There were no other changes, no late payments, no inquiries, no new lines of credit, nothing.  I just don't understand why paying down debt would lower one's score so dramatically.  I understand the overall credit mix and the credit utilization factor, but come on, a 45 point decrease for paying off debt.  My score was 729 before the drop.  Can somebody help me to understand this?  Thanks!


Two things going on: revolving utilization and installment utilization.

 

Revolving - if every single one of your cards reports $0 balance, that is a straight negative.  Let a small balance report on the next statement, you'll recover that portion of the scorecard, and go on with life.

 

Installment - FICO 8 is a departure from FICO 04 in that it wants not only open installment loans, but also having installment loans at a pretty ratio (aggregate current balance to aggregate original balance).  We've basically found breakpoints around 70% and around 10%.  The fix for this if you don't have any other installment loans, simply open up a small secured loan (or similar) from Alliant or similarly friendly lender, and then turn right around and pay back 95% of it and then just let it sit for as long as possible (next due date will be years from now with the majority of lenders), paying like $1 every six months just to keep any inactivity fees away if your lender has such.

 

It's nothing to do with you, it's simply statistics based on the vast quantity of data that FICO has to predict default... ain't personal, just credit scores, and fortunately we have known methods for strategizing this part of the algorithm.

Starting Score: EQ 5 561, TU 98 567, EX 2 599 (12/30/11)
Current Score: EQ 5 771, TU 4 758, EX 2 758, EQ 8 795, TU 8 762, EX 8 786 (7/28/17)
Goal Score:    EQ 5 750, TU 4 750, EX 2 750, EQ 8 800, TU 8 Blah, EX 8 800 (01/01/18)


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Re: Paying off my car loan ruined my credit. Score dropped 70+ points.

My credit score dropped 64/62 (equifax/transunion) points upon completion of my car loan. I suspect it was due to the loan being my oldest account (I moved to the US 3 years ago and got a car loan, but couldn't get a credit card until a year ago because of my lack of credit history.

 

A week ago my credit 748...today it's 632. First drop happened a few days ago because I opened a new credit card and moved my credit balance from my one credit card to the other. The next day it registered my final installment of the car loan and the account closing.

So reducing my debt and paying back a loan has moved me from being in great credit standing to near the bottom. What a broken system. 

Super Contributor

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.

Just wanted to verify you are talking FICO scores here.  That being said, it takes time to build a good credit score and the fact you have a PIF loan gives you more power over your life then having a high credit score.

10/17/2017 FICO: EQ 829 TU 830 EX 826
Community Leader
Senior Contributor

Re: Paying off my car loan ruined my credit. Score dropped 70+ points.


xaaronfx wrote:

My credit score dropped 64/62 (equifax/transunion) points upon completion of my car loan. ...


Marty correctly picked up on the fact that you reference a drop at EQ/TU.  That strongly suggests you are getting your scores from Credit Karma.  Karma uses a model called VantageScore.   Almost no lenders or CC issuers use VS.  This is why he asked if you were sure the scores were FICO scores --- Vantage scores are not FICO.

 

Let us know if you'd like some advice on an almost completely cost free solution to getting your three FICO 8 scores on a fairly regular basis.  These will be a much more reliable gauge as to what lenders might use.  A good first place to try would be the $1 trial offer at Credit Check Total.

 

Furthermore, if that was your only installment account, we can suggest a simple painless way to gain roughly 30 extra FICO scoring points, once you have pulled your true FICO scores.