Cut a $25k check to pay off our last debt, and as of July 5, 2019 our household is officially DEBT FREE. We owe no payments to anybody. We owe NOTHING. I don’t think it’s sunk in fully just yet. I haven’t tallied everything up to the penny yet. Over the last 13 months we paid off roughly $55k in debt and cash flowed about another $20k in other (mostly) unexpected expenses.
It was a simple path to get there, nothing new or groundbreaking. We made a budget and stuck to it religiously, and also worked like a crazy person soaking up every minute of overtime available. It can be done.
When I became debt free my scores went down about 100 points - 40 points when I paid off the car loan and 60 more when I paid off the mortgage the following month. YMMV but the hit for being financially responsible and solvent can be tough. I would think that the FICO scores would take into account the fact that a person has paid off all debt as a good thing, but since FICO is based on the premise of how likely are you to NOT make a payment in the future, it looks at being debt free as a NEGATIVE - that you won't be making any payments in the future, and the fact that no payments are due in the future just doesn't figure into the equasion. If you aren't paying somebody something, then FICO assumes you just shouldn't be trusted with money.
You make a good point and it’s something that’s always irked me about our current system. Maybe placing more emphasis on the ability to repay and weighing overall DTI is the answer. Neither of those necessarily predict future chance of default, but there’s nothing stopping someone with a 780 FICO from missing a payment or filing bk at any given time.
My point exactly - why was I a worse credit risk when I had no car payment or mortgage payment than when I had a car payment and a mortgage payment? Between the two payments I had committed $1500 a month. All of a sudden I had $1500 a month more in disposable income, and my credit scores took a 100 point hit because of it (nothing else changed). I have since gotten those 100 points back plus by taking out some credit cards (which I didn't need and had lived 7 years credit card free without) just so I could do the AZEO method to boost my scores. The only thing FICO hates more than NO DEBT is NO CREDIT CARD DEBT. So, as long as the credit card companies are reporting SOME debt (even if it is for nothing more than a tank of gas) then FICO thinks I am a good risk. Who would have thought that owing money for a tank of gas would boost your credit score by 100 points or more? Installment loans do very little to boost your score but miss a payment on one and your score will sink faster than the HMS Hood. Owe $25 on a credit card for a tank of gas with $35,000 in available credit lines and you can have an 800 score. Pay off that $25 without charging it on some other card and you will lose about 30 of those points (I have seen it happen in my MyFico pages. My Util never goes above 3%.)
Congrats on being debt free! What a great accomplishment - Enjoy it!