topic Re: Score declines with payoff in Understanding FICO® Scoring

Score declines with payoff

Lushi — Sun, 11 Sep 2016 06:41:03 GMT

I paid off my auto loan, and my score dropped 19 points. Recently, I also paid off all credit card debt. Will this also result in significant point decline? I have two student loans outstanding, nothing else. What's the best way to recover 19 points?

Thank you!

Re: Score declines with payoff

Anonymous — Sun, 11 Sep 2016 07:59:42 GMT

Yes paying off all of your last installment loan and/or paying off all of your CC debt will result in a score decline. You still have student loans, so since you still have that part of credit mix satisfied I'd say that your installment loan utilization probably went up quite a bit in closing out the auto loan; you probably had very low utilization on the auto loan right before paying it off, which lowered your overall installment loan utilization. After paying off the auto loan, especially if your student loans have high balances still relative to their original balances, installment utilization likely rose which is why your score dropped some. No real way to get those points back except to pay down those student loans.

As far as CC's go, just let one of your revolvers report a small balance of 1%-9% of the credit limit every month and you'll maximize your FICO points there.

Re: Score declines with payoff

SouthJamaica — Mon, 12 Sep 2016 16:12:24 GMT

@Lushi wrote:
I paid off my auto loan, and my score dropped 19 points. Recently, I also paid off all credit card debt. Will this also result in significant point decline? I have two student loans outstanding, nothing else. What's the best way to recover 19 points?

Thank you!

I'm skeptical that paying off the auto loan would drop your score while you still have student loans outstanding, and suspect that it was the paying off of the credit cards that caused the loss in points. If I'm right about that, the easy way to get those points back is to let one of your credit cards report a small balance while the others continue to report at zero. Having all credit cards at zero reduces one's scores.

Re: Score declines with payoff

Revelate — Mon, 12 Sep 2016 19:37:10 GMT

@SouthJamaica wrote:
@Lushi wrote:
I paid off my auto loan, and my score dropped 19 points. Recently, I also paid off all credit card debt. Will this also result in significant point decline? I have two student loans outstanding, nothing else. What's the best way to recover 19 points?

Thank you!
I'm skeptical that paying off the auto loan would drop your score while you still have student loans outstanding, and suspect that it was the paying off of the credit cards that caused the loss in points. If I'm right about that, the easy way to get those points back is to let one of your credit cards report a small balance while the others continue to report at zero. Having all credit cards at zero reduces one's scores.

Depends what the ratios are on the student loans. Wasn't enough information to pin it down, could be that alone, could be both.

Re: Score declines with payoff

Anonymous — Mon, 12 Sep 2016 22:51:33 GMT

In most cases, paying off an installment loan more often than not is going to raise overall installment loan utilization which could result in a score decline. The exceptions to this are if the loan being paid off is still very new and has high utilization but you come up wtih a way to just pay it off in a big lump sum... this way you are eliminating a loan that was at high utilization. The other exception which is related to the first is if the other installment loan(s) you have is very close to being paid off (low utilization).

I was assuming (and only because it's the most probable situation) that your auto loan is at very loan utilization now as that's the state they are usually in just prior to being paid off and that your student loans were at higher utilization levels.

Re: Score declines with payoff

SouthJamaica — Mon, 12 Sep 2016 23:30:15 GMT

@Revelate wrote:
@SouthJamaica wrote:
@Lushi wrote:
I paid off my auto loan, and my score dropped 19 points. Recently, I also paid off all credit card debt. Will this also result in significant point decline? I have two student loans outstanding, nothing else. What's the best way to recover 19 points?

Thank you!
I'm skeptical that paying off the auto loan would drop your score while you still have student loans outstanding, and suspect that it was the paying off of the credit cards that caused the loss in points. If I'm right about that, the easy way to get those points back is to let one of your credit cards report a small balance while the others continue to report at zero. Having all credit cards at zero reduces one's scores.

Depends what the ratios are on the student loans. Wasn't enough information to pin it down, could be that alone, could be both.

Good point

Re: Score declines with payoff

SouthJamaica — Mon, 12 Sep 2016 23:30:54 GMT

@Anonymous wrote:
In most cases, paying off an installment loan more often than not is going to raise overall installment loan utilization which could result in a score decline. The exceptions to this are if the loan being paid off is still very new and has high utilization but you come up wtih a way to just pay it off in a big lump sum... this way you are eliminating a loan that was at high utilization. The other exception which is related to the first is if the other installment loan(s) you have is very close to being paid off (low utilization).

I was assuming (and only because it's the most probable situation) that your auto loan is at very loan utilization now as that's the state they are usually in just prior to being paid off and that your student loans were at higher utilization levels.

Good point

Re: Score declines with payoff

Lushi — Tue, 13 Sep 2016 00:43:35 GMT

Thanks, all! After posting, I did a considerable amount of research, and am almost positive that the reason for the drastic drop in points is that my student loans have a high balance $180,000, and the only other installment that I had (car at $15k), was paid off. I was also able to pay off all of my credit card debts, but will be sure to keep a small balance of between 1% - 9% in play.

Re: Score declines with payoff

SouthJamaica — Tue, 13 Sep 2016 02:27:57 GMT

@Lushi wrote:
Thanks, all! After posting, I did a considerable amount of research, and am almost positive that the reason for the drastic drop in points is that my student loans have a high balance $180,000, and the only other installment that I had (car at $15k), was paid off. I was also able to pay off all of my credit card debts, but will be sure to keep a small balance of between 1% - 9% in play.

What was the original amount of the student loans, and what was the auto loan balance just before the payoff/score drop?

Re: Score declines with payoff

Lushi — Tue, 13 Sep 2016 03:00:54 GMT

The original amount of the auto loan was $35k but $15k at payoff. Student loans approximately $200k originally, but $180k now.

Re: Score declines with payoff

SouthJamaica — Tue, 13 Sep 2016 04:06:19 GMT

@Lushi wrote:
The original amount of the auto loan was $35k but $15k at payoff. Student loans approximately $200k originally, but $180k now.

OK here's what happened.

195k/235k=83%

180k/200k=90%

So your installment loan utilization increased to 90%, which did cause a point loss.

When you get the student loans paid down to 166k, and probably sooner, you'll be back at 83% and have your points back.

If FICO points were your only objective, the better strategy would have been to pay the auto loan down to, say, $1000, rather than zero, and pay $1k towards the student loans, to keep the $35k face amount of the car loan in play, at which point your ratio would have been:

student loans 179k/200k

car loan 1k/35k

aggregate installment loan utilization=180k/235k=76.6%

But of course it's worth the point loss to get that clean title on your car

Re: Score declines with payoff

Lushi — Tue, 13 Sep 2016 10:49:48 GMT

Thanks so much! I have a lot to learn here. Ultimately, our goal is to buy a house in the next 12 - months, so I would like to get my score up, and will work on a strategy for that.

Re: Score declines with payoff

Anonymous — Tue, 13 Sep 2016 11:37:55 GMT

Man, that's a lot of money in student loans, it may as well be a mortgage! I guess I was correct in assuming that the utilization on those loans was greater than that of your auto loan.

There could be a threshold at 90% that once crossed could get you back some points. You suggested that you were at $180k owed which is exactly 90% of $200k... not sure if you were rounding these numbers off or if they're exact... but my point is that if you haven't quite crossed 90% yet you could see a few points when you do.

I'm pretty sure that the first significant threshold crossed for installment loans is 70%... so on $200k in loans that would be $140k which I would imagine could be a ways away. Your score will grow in the meantime of course, but there's a chance you won't see much growth from the installment loan being paid down until you get below $140k remaining as at that point you'll have reached "significant installment loan repayment" in the eyes of FICO.

Re: Score declines with payoff

Anonymous — Tue, 13 Sep 2016 17:58:12 GMT

@Lushi wrote:
Thanks so much! I have a lot to learn here. Ultimately, our goal is to buy a house in the next 12 - months, so I would like to get my score up, and will work on a strategy for that.

Some may not agree with the ever-changing rules of the credit game BUT no one can deny the good feeling that comes along with fully owning a car w/ ZERO monthly car payments.

Also for the future, do keep in mind that FICO 08 (the primary score you see thrown around) is not used for mortage lending. Check the below myfico link for more details:

http://www.myfico.com/crediteducation/fico-score-versions.aspx

A key takeaway is that these scores may be different...sometimes significantly different. You may have an excellent FICO 08 score but your FICO 04 might be 50 points lower (or hopefully higher). IMO, it's worth spending some money to take a glance at your FICO mortage scores to see where you are at on the scale.

Re: Score declines with payoff

Lushi — Wed, 14 Sep 2016 00:58:33 GMT

Thank you!

Re: Score declines with payoff

Lushi — Wed, 14 Sep 2016 01:00:34 GMT

Thank you, and yes, it is a lot in student loans....