topic Re: Paid off student loan FICO -20pts in Understanding FICO® Scoring

Paid off student loan FICO -20pts

Credit_hawk — Tue, 22 May 2018 06:51:47 GMT

Hey guys, I paid off my student loan and my FICO dropped 20 points. I remember reading some people claim this wouldn’t happen because it stays on there for 10 years before falling off or something. That wasn't the case, haha.

Anyway, I just paid it off last month and it reported closed. So, what’s the best thing? Should I leave it alone? Get an installment loan and pay it down and let it sit? Or what ? I heard Alliant won’t allow the savings secured loans anymore? Is this true?

Thanks for any information.

Re: Paid off student loan FICO -20pts

Anonymous — Wed, 16 May 2018 21:30:49 GMT

@Credit_hawk wrote:
Hey guys, I paid off my student loan and my FICO dropped 20 points. I remember reading for years some people claim this wouldn’t happens because it stays on there for 10 years before falling off or something. WRONG! Haha.

Anyway, I just paid it off last month and it reported closed. So, what’s the best thing.m? Should I leave it alone? Get an installment loan and pay it down and let it sit? Or what l? I heard Alliant won’t allow the savings secured loans anymore? Is this true?

Thanks for any information.

Has nothing to do with a closed account staying on your reports for 10 years. I'm sure your studnet loan still shows. Your score dropped because you paid it off which is a known way for FICO scores to drop,especially if it's your only installment loan. FICO scores are optimized when you have a mix of credit types which includes open installment loans. The same score drop happens to people who pay off auto and personal loans for example. Not sure about the Alliant secured loan but I'm sure @Anonymous knows the answer.

Re: Paid off student loan FICO -20pts

Anonymous — Thu, 17 May 2018 21:05:21 GMT

Alliant still works fine, as long as you get their unsecured loan. This thread summarizes the current known alternatives to the Alliant SSL.

https://ficoforums.myfico.com/t5/General-Credit-Topics/The-Quest-for-an-SSL-alternative-to-Alliant/td-p/5162448

Re: Paid off student loan FICO -20pts

SouthJamaica — Fri, 18 May 2018 03:40:47 GMT

@Credit_hawk wrote:
Hey guys, I paid off my student loan and my FICO dropped 20 points. I remember reading for years some people claim this wouldn’t happens because it stays on there for 10 years before falling off or something. WRONG! Haha.

Anyway, I just paid it off last month and it reported closed. So, what’s the best thing.m? Should I leave it alone? Get an installment loan and pay it down and let it sit? Or what l? I heard Alliant won’t allow the savings secured loans anymore? Is this true?

Thanks for any information.

1. FICO 8's algorithm penalizes you for having no open installment loans; other FICO scores react differently. Some of the mortgage scores don't react at all. Although there has been a great amount of discussion in this forum on the effect on FICO 8, there's been almost no discussion of the effect on other FICO scores.

2. There's no great way to replace it, now that Alliant's SSL is no more.

3. If you think of replacing it with another loan, bear in mind you will be adding a new account -- which causes you to lose some points both in Average Age of Accounts and in Age of Newest Account -- and for some loans you will incur a hard inquiry, which costs points too.

Re: Paid off student loan FICO -20pts

Anonymous — Sat, 19 May 2018 04:07:10 GMT

SJ, it's worth noting that the pieces of information discussed in point 3 of your post above don't necessarily have to lower score. Opening a new account will definitely cause someone to lose age of their AAoA and AoYA, but that doesn't mean they will lose points if no thresholds are crossed in the process. The same goes for an inquiry. It's possible to lose no points at all from the addition of a single inquiry, but it all depends on the profile in question.

Re: Paid off student loan FICO -20pts

HeavenOhio — Sat, 19 May 2018 04:18:27 GMT

Closed loans no longer contribute to your credit mix, which is where you would have lost your points. But they still contribute to your positive payment history and file thickness. And they may prop up your account age stats.

Re: Paid off student loan FICO -20pts

Credit_hawk — Tue, 22 May 2018 06:48:48 GMT

Hey, thanks for all the responses guys! Sorry I've been tied up the past week. Thank you for explaining the loan options. I am a member with Alliant. It's too bad they got rid of their SSLs. The FICO mix drop took me from 790 to 769. I'm thinking of just getting an unsecured loan. It seems the best rate Alliant has for an unsecured personal loan is 10%? Coincidentally, I logged into my AMEX account today and a banner popped up telling me I'm pre-approved for a personal loan @ 8.98%. I would take $5,000 out and pay it down to maybe $1,000 and make payments for a year or two. Thoughts? Is Alliant unsecured still better than AMEX?

Thanks guys!!

Re: Paid off student loan FICO -20pts

Anonymous — Tue, 22 May 2018 12:52:19 GMT

Paying down a $5000 loan to $1000 may only yield around half the possible points that would be achieved compared to taking it down to under 8.9%, or under $445. If you were to take it down to that amount, you'd be paying around $40/yr in interest to have that loan. To me, that isn't worth it compared to a SSL where you pay at most a few dollars in interest over the life of the loan.

Also the question to ask is if you make a dramatic paydown on an Amex person loan, do they push your payment due date way out into the future, or do you still have to make a payment every month? If they allow you to push it way out (years, allowing you to take the loan to full term) you could pay it down to say $40 rather than $445-$1000 and treat it the way you would a SSL. 8.98% on $40 wouldn't be the end of the world. I wouldn't think that Amex would allow you to do this though, or it would definitely be considered a viable option to the SSL.

Re: Paid off student loan FICO -20pts

Anonymous — Tue, 22 May 2018 14:59:22 GMT

In the Quest for An Alternative To Alliant thread, we recommend a $500 unsecured loan from Alliant as one of the three alternatives we have found to the SSL. Just pay it down to under 8.9% and make sure the interest never causes it to go over that. (Pushing $1 monthly from an external checking into your loan account will certainly do the trick.)

Re: Paid off student loan FICO -20pts

Credit_hawk — Tue, 22 May 2018 18:58:49 GMT

Hey guys thanks for getting back quickly. When I say 8.9% I’m talking about the APR not the percentage of loan paid. I have a lot in savings and I’ll pay it down to whatever I need to.

I meant simply that AMEX offered me a loan at 8.9% APR. I agree that I wonder if I pay a large chunk off if they’ll not bill me for months but I suspect they will and then it becomes pointless as the loan will be paid off in a few months rendering it useless.

Dixie, how long can I get that from Alliant? Will they do $500 for 60 months? I assume you mean that they have a repayment system where if I pay $400 back I don’t have to make a payment for months if not years?

Thanks again.

Re: Paid off student loan FICO -20pts

Anonymous — Tue, 22 May 2018 19:21:46 GMT

Yes. You should be able to pay the $500 loan down to $40, which will (at Alliant) cause the due date for the next payment to be pushed 4.5 years into the future.

I enourage you to visit the link I gave you earlier. If you do, you will find this review of the Alliant Unsecured:

Alliant Credit Union (unsecured loan option)
Score: 99% chance this will work
Advantages:
* Works basically just like a Share Secure loan as far as early paydown

* The early paydown essentially negates any problem with the interest rate
Disadvantages:
* Hard pull (we expect on Equifax)
* People with low scores may be rejected

Also at the top of the thread is a link to the Share Secured Loan Technique thread.

Re: Paid off student loan FICO -20pts

SouthJamaica — Wed, 23 May 2018 20:26:08 GMT

@Anonymous wrote:
Yes. You should be able to pay the $500 loan down to $40, which will (at Alliant) cause the due date for the next payment to be pushed 4.5 years into the future.

I enourage you to visit the link I gave you earlier. If you do, you will find this review of the Alliant Unsecured:

Alliant Credit Union (unsecured loan option)
Score: 99% chance this will work
Advantages:
* Works basically just like a Share Secure loan as far as early paydown
* The early paydown essentially negates any problem with the interest rate
Disadvantages:
* Hard pull (we expect on Equifax)
* People with low scores may be rejected

Also at the top of the thread is a link to the Share Secured Loan Technique thread.

Additional disadvantages which come to mind:

* Age of newest account lowered

* Average age of accounts lowered

Re: Paid off student loan FICO -20pts

Anonymous — Wed, 23 May 2018 23:19:03 GMT

Yup. But that review is being given in the context of the "quest for an alternative to the Alliant Share Secure loan." Compared to the SSL, Alliant's unsecured loan has the two disadvantages given.

But all variations of the "get a loan and pay it down" technique necessarily involve a hit to Age of Youngest and Average Age. So I am not reminding everyone in each of the reviews of the disadvantages common to all.

Nobody should use the technique at all unless he is concerned chiefly with FICO 8 (not the mortgage scores) and has no loans (or will soon have no loans). If those are true for him, the benefit will outweigh the penalty 99% of the time or more, and by a significant margin I would think. I am pretty sure we never had a single person on the monster thread indicate a net score loss. A small minority of people did indicate a gain of only 15-20 points, contrasted to the 25-35 points for the people in the middle.

Re: Paid off student loan FICO -20pts

Anonymous — Wed, 23 May 2018 23:23:04 GMT

@SouthJamaica
Additional disadvantages which come to mind:
* Age of newest account lowered
* Average age of accounts lowered

Those are the reasons above why I've shot down the idea of adding a SSL to my file.

My AoYA finally reached 12 months earlier this month and I saw 15-16 point gains to my FICO 08 scores. My penalty from closing an auto loan a few months back (mortgage still open, though) was about 5-6 points. I'd think then that on my profile the addition of a SSL would only be "worth" 5-6 points... but they'd come at the expense of a 15-16 point drop from the AoYA drop, so my net loss for Year 1 would be ~10 points where my net gain after 1 year would be ~+5 points. I'm pretty sure that in < 1 year I'll be able to achieve 850's across the board without a SSL in place, so to me it's not worth the AoYA/AAoA drop in adding one.

Re: Paid off student loan FICO -20pts

Credit_hawk — Thu, 24 May 2018 05:05:39 GMT

Dixie, I was doing this both to resore my FICO 8 but my primary reason was I assumed my closed installment loan would also cause my mortgage FICO to drop 10-20pts and cause me not to get the best interest rates when I apply in a year or two. In that case the hit on my AAoA would be minor compared to locking in the best interest rate.

Are you saying that installment loans, whether obtaining one or closing one has little to no impact on the mortgage FICO scores?

Re: Paid off student loan FICO -20pts

Credit_hawk — Thu, 24 May 2018 05:09:19 GMT

BBS, you make a great point. I haven’t applied for anything in 2 years with the exception of PayPal Credit but that’s hidden as of now.

I’m reluctant to to take a hit on my AAoA but it can’t be worse than my 20 pt drop. That was shocking. I went from a 790 to a 769 EX. And a 780 to a 759 on TU.

Re: Paid off student loan FICO -20pts

Anonymous — Thu, 24 May 2018 07:35:01 GMT

@Credit_hawk wrote:

Are you saying that installment loans, whether obtaining one or closing one has little to no impact on the mortgage FICO scores?

It affects one of the three mortgage scores but we have mixed reports as to which one.

Re: Paid off student loan FICO -20pts

Anonymous — Fri, 25 May 2018 00:59:02 GMT

@Credit_hawkBBS, you make a great point. I haven’t applied for anything in 2 years with the exception of PayPal Credit but that’s hidden as of now.

I’m reluctant to to take a hit on my AAoA but it can’t be worse than my 20 pt drop. That was shocking. I went from a 790 to a 769 EX. And a 780 to a 759 on TU.

I think it's important to understand here that your biggest hit would come from your AoYA drop, not your AAoA drop in this example. Your AoYA dropping from ~24 months to 0 months would likely cost you at least 15 points, perhaps 20 points. Your AAoA drop unless you have very few accounts likely wouldn't be all too significant.