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Pay off a loan- Scores take a huge hit.

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Regular Contributor

Pay off a loan- Scores take a huge hit.

So, at the begining of August we traded in or car for a new car. The new load reported before my exsisting loan showed pay. I saw a small bump in scores with the new loan; however, when Ford reported $0 balance on my old loan, my scores dropped over 40 points. I just don't get it. I've been working hard to improve my scores, and now it's like getting kicked in the nuts when I see a 40+ point drop. 

 

Why do scores drop so much paying off a loan? It happened in April when I paid off another installment loan.

 

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Super Contributor

Re: Pay off a loan- Scores take a huge hit.

One reason for the score drop is something we'll call "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

 

So my guess is that you had paid off a good chunk of the car previously.  Therefore a few months ago your installment utilization was fairly low.  (One open loan that was largely paid off.)  If it was 70% paid off, your installment utilization would be 30%.  FICO likes a low installment U.

 

But today you have one open loan of which almost none of it is paid off.  So your installment util is close to 100%.  FICO sees that as bad.

 

BTW, where are you getting your scores from?  A 50 point drop is not explainable purely by a change in installment util.  It's possible that the scoring model they are using is not FICO 8.  Or it could be something else happened on your reports at the same time.

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Regular Contributor

Re: Pay off a loan- Scores take a huge hit.

Thanks for the explination. My original loan was about 50% paid off (15K 0f 30K loan). I get my scores from my 3B myfico account. So I get alerts for everything. I got an alert for a balance change. Logged in to check it out - Ford $0 balance   Exp -47, EQ -28, and TU -13. 

 

 

Thanks again, I figured it was something along those lines.

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Super Contributor

Re: Pay off a loan- Scores take a huge hit.


@CreditGuyInDixie wrote:

One reason for the score drop is something we'll call "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

 

So my guess is that you had paid off a good chunk of the car previously.  Therefore a few months ago your installment utilization was fairly low.  (One open loan that was largely paid off.)  If it was 70% paid off, your installment utilization would be 30%.  FICO likes a low installment U.

 

But today you have one open loan of which almost none of it is paid off.  So your installment util is close to 100%.  FICO sees that as bad.

 

BTW, where are you getting your scores from?  A 50 point drop is not explainable purely by a change in installment util.  It's possible that the scoring model they are using is not FICO 8.  Or it could be something else happened on your reports at the same time.


I'm not so sure about that. When I dropped installment utilization from 89% to 9% some of the scoring models went up 50 points or more:

 

TU
Auto 8 +58
Bankcard 8 +56

EX
Bankcard 8 -- +50


Total revolving limits 653000 (575000 reporting)

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Super Contributor

Re: Pay off a loan- Scores take a huge hit.

Thanks SouthJ.  That's good to know.

 

In our OP's case, it still feels like there was something else going on (in addition to the IU change).  I was pretty sure that he was not at an ultralow installment U -- and as it turned out he wasn't.  Sounds like he's gone from 50% to 100%, which still shouldn't be a 50 point shift.

 

Good to know that going from very high to very low can cause a shift that profound.

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Regular Contributor

Re: Pay off a loan- Scores take a huge hit.

The same thing happened in April. I had a $37K loan with Kubota credit (5yr / 0%arp) that I paid off and my scores dropped a little over 20 points.  

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