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

Visitor

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

I was indeed referencing scores based on Credit Karma/Chase Credit Journey. I understand these are not the same, but they are related and must be relatively proportional. When I got a mortgage, lenders came back and told me my score was 710 when Credit Karma/Chase Journey showed it being in the 730s, so it was lower than the VantageScore. That being said, I only followed my credit report when I moved to the US so I could eventually get a mortgage, which I no longer need.

I don't need money lent to me at this point in my life or for the forseeable future so I'm quite content to just say f*** creditors and their system built to manipulate people into lining the pockets of the 1% in return for a better 'score' Smiley Happy

Message 61 of 90
Regular Contributor

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

This is the kind of thing that blows my mind. How could ANY scoring system think that paying off a loan is a bad thing in ANY WAY?

 

It's ONLY good, any possible way they could look at it:

 

1. It shows the ability to pay off a balance over the long term until completion. GOOD.

 

2. The lack of payment on the paid-off account means more cash available to pay other bills. GOOD.

 

This is the strangest thing I've seen yet with regards to credit scoring. I'm afraid to pay off our car now because we're just now getting our scores back on track.

06/2017 FICOs: TU: 542 EX: 538 EQ: 528
07/2017 FICOs: TU: 564 EX: 564 EQ: 559
08/2017 FICOs: TU: 598 EX: 597 EQ: 584
09/2017 FICOs: TU: 621 EX: 615 EQ: 608
09/2017 FICOs: TU: 633 EX: 620 EQ: 608
Message 62 of 90
Community Leader
Senior Contributor

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

Don't be afraid to pay off your car (or any other loan).  There's an easy technique that will enable you to prevent any scoring point loss.  It's called the Share Secure Loan technique.  It helps people who either have no open loans, or who will soon have no open loans.

 

You can find out about it here.  You just need to read the first 2-3 posts.

 

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

Message 63 of 90
Senior Contributor

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


JustTara wrote:

This is the kind of thing that blows my mind. How could ANY scoring system think that paying off a loan is a bad thing in ANY WAY?

 

It's ONLY good, any possible way they could look at it:

 

1. It shows the ability to pay off a balance over the long term until completion. GOOD.

 

2. The lack of payment on the paid-off account means more cash available to pay other bills. GOOD.

 

This is the strangest thing I've seen yet with regards to credit scoring. I'm afraid to pay off our car now because we're just now getting our scores back on track.


I'll respectfully disagree with you here.  I agree 100% that paying off a loan is always a "good" thing, as less debt is always the more favorable situation.  With respect to a scoring model, though, I completely understand why it works the way it does.  The scoring model needs to see the presence of an open installment loan to know that you have the ability to make monthly payments right now, at this point in time.  While you may have paid off several loans according to the loan terms in the past, they were exactly that, in the past. 

 

Here's an example.  Cornelius has a job making $35k/yr and has a $500/mo auto loan payment.  It's a tough payment for him to make based on his salary and other expenses, but he is just able to do it every month.  He finally pays off the auto loan and within days of doing so gets let go from his job.  His income is now $0.  Good thing he paid off that auto loan a few days ago!  Here's the thing.  If Cornelius were to seek another auto loan right away, no doubt he'd be able to get it.  But would he be able to make the payments on it?  Not without any income.  Scoring models need to know that someone has the ability to make on-time monthly payments today and without the presence of an open installment loan and the ability to make on-time monthly payments, it can't assume that just because some was able to pay off their last loan that they could replicate the same thing right now.  Job loss, medical bills, loss of a loved one, etc. can happen at any given moment.  Simply put, the present matters more than the past.

 

This is actually true of other scoring factors as well.  Utilization matters in the present, not the past.  You could have been at maxed out utilization 2 months ago, but if you've paid down all of your balances to $0 your score today will reflect those $0 balances and not be influenced at all by the maxed out utilization from 2 months ago.  Payment history is another one.  A 60-day late payment from 5 months ago is going to be far more impactful than a 60-day late payment from 5 years ago, because it's more current.  Even more recent, say it was 5 days ago (and it reported) it's going to be even more impactful.

Message 64 of 90
Senior Contributor

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


xaaronfx wrote:

I was indeed referencing scores based on Credit Karma/Chase Credit Journey. I understand these are not the same, but they are related and must be relatively proportional.


Not necessarily.  There are people that report their FICO scores 100 points higher than their VS 3.0 scores, while there are others that report their VS 3.0 scores 100 points higher than their FICO scores.  Trying to draw comparisons between them really isn't a good idea, as they are all over the place to be honest.

Message 65 of 90
Visitor

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

Your example mentioned one very important detail - the gentleman's income moved to $0. If I were to decide tomorrow to purchase a new vehicle, still under the assumption my FICO score was similar to non-FICO, they would pull up my credit score and offer me an insanely high interest rate if I chose to finance. I would say, "excuse me but my salary is higher now than it was 3 years ago and I paid off my last loan". Obviously a futile position of me to take since the credit score is going to weigh more than my salary, no? To say that model works when it is so clearly designed to force people to carry debt is ridiculous. It's very self serving of banks and institutions to build a model that benefits them financially.
Message 66 of 90
Community Leader
Senior Contributor

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

Just for clarity, it is easy to make FICO very happy (in regards to credit card debt) without carrying any of it -- and with regards to installment debt, by carrying only a tiny amount of it (e.g. a balance of $40 say).

 

Just want to go on record about that one more time, so that we don't accidentally misinform readers.  As a practical matter, having a very high score while being virtually debt free is very easy to do.  Should people want to talk about those easy actionable steps, any of us (BBS included) can outline what to do in a heartbeart.

Message 67 of 90
Senior Contributor

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


xaaronfx wrote:
Your example mentioned one very important detail - the gentleman's income moved to $0. If I were to decide tomorrow to purchase a new vehicle, still under the assumption my FICO score was similar to non-FICO, they would pull up my credit score and offer me an insanely high interest rate if I chose to finance. I would say, "excuse me but my salary is higher now than it was 3 years ago and I paid off my last loan". Obviously a futile position of me to take since the credit score is going to weigh more than my salary, no? To say that model works when it is so clearly designed to force people to carry debt is ridiculous. It's very self serving of banks and institutions to build a model that benefits them financially.

It's not designed to force people to carry debt.  If that were the case, there would be more of a penalty for lesser installment loan debt.  What you're suggesting then would be when you open up an installment loan at 100% utilization you'd get a nice score increase, then as you pay it down you'd lose points along the way.  Obviously that doesn't happen, so what you're saying isn't the case.

 

Keep in mind this entire discussion involves all of 30 points on your FICO score, which constitutes only 5% of your overall score if you go from having no installment loan to an almost-paid-off installment loan.  These points very rarely will result in a make or break situation.

 

Again to quickly reiterate my point, just because someone has paid off an installment loan successfully in the past does not mean they have the ability to do so today.  The one example I gave would be if someone at the time of their first (successfully paid to terms) installment loan had income where today they don't.  Therefore if they were to open an installment loan today it's reasonable to think that they'd have more of an issue making on-time payments without an income source.  Life happens.  There are tons of things that can cause someone today to not be able to pay their bills that they were able to pay 10 years ago, 5 years ago, 1 year ago, 1 month ago even.  I have no problem with FICO needing to see an open installment loan present to yield an additional 30 point gain and I understand why.  It's not all palm trees and breeze though.  If someone misses making a payment on this installment loan, their score can drop 50-100 points, as we all know. 

 

Anyway, CGID several times in this thread has referenced the SSL technique which makes this whole argument sort of moot, as the work around for getting those 30 points is extremely easy for anyone to accomplish without having to take out a "real" installment loan and add debt to their profile.

Message 68 of 90
Visitor

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

Chase offers a free FICO score once a month, possibly because I have a Sapphire card - anyways, my current score as of Sept. 2nd is 746, although I suspect this to drop considerably come October due to the balance transfer and auto loan completion. I also was a day late making my credit card payment this month..for the first time in my life..sigh.

What is this SSL technique? Or any other method of opening an installment loan which doesn't require a relevant interest payment?
Message 69 of 90
Community Leader
Senior Contributor

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

It's called the Share Secure Loan technique.  It helps people who either have no open loans, or who will soon have no open loans.

 

You can find out about it here.  You just need to read the first 2-3 posts.

 

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

 

Message 70 of 90