Why did paying off a loan drop my scores by 16 points?

[madredejames]

I recently paid off a loan, with the balance now zero. I am using the MyFICO monitoring service on all three bureaus. I get frequent alerts. Recently, the alerts on 2 bureaus show this loan as paid, zero balance, paid as agreed, but along with each alert my score dropped from the 680s to the 660s. I'm really confused. Why would paying off a loan drop my score?

[CreditMagic7]

Others are better equipped to detail this out for you in a way you can understand, but in essence FICO penalizes via points (and some heafty drops) by being responsible in paying off debt of this sort. It's a part of their nonsense of Mix Of Credit. IMHO their formulas are stuck in the 20th Century.

I want to pay off my auto loan but i know the very day that i do, that FICO scoring will tank the hell of my scores because of "missing installment data" reporting. Bahhhh. FICO suxs and is not at all a very effective indicator of RISK when it comes to Mix Of Credit AFAIK but it's their shell game.

[madredejames]

Yeah, this makes zero sense - being responsible and paying off a debt should never LOWER your score. FICO is incredibly frustrating to me. I will be glad when the last few derogatories I have age off so that a stupid fluctuation like this doesn't hurt me as much.

[Revelate]

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@madredejames wrote:

Yeah, this makes zero sense - being responsible and paying off a debt should never LOWER your score. FICO is incredibly frustrating to me. I will be glad when the last few derogatories I have age off so that a stupid fluctuation like this doesn't hurt me as much.

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It's just data analytics not personal.  FICO 8 (and 98) want to see two things from installment lines:

• Open
• Pretty ratio of current balance to original balance

FICO's data presumably found that people who didn't fall into those categories were at a higher risk of default, and that's reflected in the resulting score.

Easy to fix with a simple secured installment loan from Alliant or similar and then re-paying the majority of the balance.

Full details if you want the entire story:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Installment-tradeline-utilization-thread/...

[Anonymous]

This month was my last payment of a home equity loan and my Equifax score fell 37 points! I have a car loan reporting later in the month. Hopefully, it will make a difference.

[CreditMagic7]

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@Revelate wrote:

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@madredejames wrote:

Yeah, this makes zero sense - being responsible and paying off a debt should never LOWER your score. FICO is incredibly frustrating to me. I will be glad when the last few derogatories I have age off so that a stupid fluctuation like this doesn't hurt me as much.

---

It's just data analytics not personal.  FICO 8 (and 98) want to see two things from installment lines:

• Open
• Pretty ratio of current balance to original balance

FICO's data presumably found that people who didn't fall into those categories were at a higher risk of default, and that's reflected in the resulting score.

Easy to fix with a simple secured installment loan from Alliant or similar and then re-paying the majority of the balance.

Full details if you want the entire story:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Installment-tradeline-utilization-thread/...

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^ This

Looks like not only a reliable as well as viable option for rebuilders but also as a cautionary measure to ward off such a drastic drop when an open installment loan (auto or other) is about ready to be paid off.

Thanks Revelate.

In my instance, i suppose if i open the share secured loan with a CU like Alliant around the first of 2016 then at the close of the final month when my current auto loan term is completed (and thereby shows closed/PIF) it should help prop up the FICO numbers or at the very least drop very little?

[jamie123]

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In my instance, i suppose if i open the share secured loan with a CU like Alliant around the first of 2016 then at the close of the final month when my current auto loan term is completed (and thereby shows closed/PIF) it should help prop up the FICO numbers or at the very least drop very little?

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Yes, it will keep your score from dropping.

We have found that it is best to get the share secured installment loan with Alliant and then pay down the balance to less than 10% remaining. This will push the next payment due date out years. (Don't set up autopayments.) You get a bump in points once your installment loan is more than 90% paid off. These are some of the points you lose once you pay off and close the loan.

[Revelate]

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@jamie123 wrote:

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In my instance, i suppose if i open the share secured loan with a CU like Alliant around the first of 2016 then at the close of the final month when my current auto loan term is completed (and thereby shows closed/PIF) it should help prop up the FICO numbers or at the very least drop very little?

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Yes, it will keep your score from dropping.

We have found that it is best to get the share secured installment loan with Alliant and then pay down the balance to less than 10% remaining. This will push the next payment due date out years. (Don't set up autopayments.) You get a bump in points once your installment loan is more than 90% paid off. These are some of the points you lose once you pay off and close the loan.

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This.

My mortgage has hosed my own installment utilization something fierce with really no hope of recovery for years, but I'm still going to roll forward another secured installment loan doing precisely this when my Alliant loan gets to around 6 months remaining.

Probably going to simply pay off the USAA loan now and kill the underlying CD at the 1% early withdrawl penalty, I should go do that come to think of it.

[madredejames]

Bottom line is still - pay off some kinds of debt, take a score hit. Acquire more of some kinds of debt, get rewarded (at least  as cited in some of these scenarios above.) I'm glad to have this kind of message board for explanations, because silly old me would have thought paying off debt was always good for the credit score. I guess that's why I am here.

[CreditMagic7]

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@jamie123 wrote:

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In my instance, i suppose if i open the share secured loan with a CU like Alliant around the first of 2016 then at the close of the final month when my current auto loan term is completed (and thereby shows closed/PIF) it should help prop up the FICO numbers or at the very least drop very little?

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Yes, it will keep your score from dropping.

We have found that it is best to get the share secured installment loan with Alliant and then pay down the balance to less than 10% remaining. This will push the next payment due date out years. (Don't set up autopayments.) You get a bump in points once your installment loan is more than 90% paid off. These are some of the points you lose once you pay off and close the loan.

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Well i suppose that's what will have to happen then and your feedback is greatly appreciated.

We have all read time and time again to no end of those surprise posts from newbies screaming to high heaven (like i would too) after being exhilerated over paying off a term loan of any sort only to be caught with their pants down (so-to-speak) when it comes to FICO scoring. OUCH.

I have 2 installments current in progress with one of those an unsecured personal loan that ends in march so i better as they say get to steppin the first quarter of 2016 to secure another before THAT ONE runs out too. And it's much sooner then the auto one.

Alliant that's been very much spoken highly of around here seems to be the most effective/efficient logical choice for this.