10 Point EX Drop for Paying Off Car Loan

[Anonymous]

July 5th report had EX @ 728. July 6th dropped to 718. The only meaningful change from one day to the next was my auto loan being reported as paid off. A couple of small student loans remain, as does a personal loan.

I assume the score hit is because while my overall installment debt has decreased, my ratio of debt owed to "open" installment loan amounts has increased? 

I haven't run a 3-bureau report yet but I assume I'll get a 10 point drop there as well? 

On the one hand I get it; on the other it seems silly. Today I have one less debt. My DTI has improved by a couple of percentage points. Yet my credit score says I am a poorer risk today than yesterday.

Are there other factors I'm not considering here? 

[Anonymous]

You covered them all.  Don't read into it too much though.  Debt free is better than the point loss.  Now you can put the money somewhere else each month that makes you money instead of paying on the car that loses money each month in depreciation.  I just paid mine off in June as well and saw 6 point drop.  

Credit can be funny sometimes when you know you're doing the right things for your financial health you don't get recognized by the scoring models as doing so.  It's designed to love debt not good habits.

[kxkxkxx]

The credit system is rigged...it prefers someone be in debt with a good credit mix (the american way!!)...as the other person posted, MUCH better to have the money and be debt free and pay cash! The point drop is punishment for your good behavior....backwards I know!

[SouthJamaica]

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@Anonymous wrote:

July 5th report had EX @ 728. July 6th dropped to 718. The only meaningful change from one day to the next was my auto loan being reported as paid off. A couple of small student loans remain, as does a personal loan.

I assume the score hit is because while my overall installment debt has decreased, my ratio of debt owed to "open" installment loan amounts has increased? 

Correct

I haven't run a 3-bureau report yet but I assume I'll get a 10 point drop there as well? 

On the one hand I get it; on the other it seems is silly.

There, I fixed it for you

Today I have one less debt. My DTI has improved by a couple of percentage points. Yet my credit score says I am a poorer risk today than yesterday.

Are there other factors I'm not considering here? 

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No there aren't.

[Anonymous]

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@kxkxkxx wrote:

The credit system is rigged...it prefers someone be in debt with a good credit mix (the american way!!)...as the other person posted, MUCH better to have the money and be debt free and pay cash! The point drop is punishment for your good behavior....backwards I know!

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Not necessarily. If a person never opened a loan to beigin with, then they wouldn't have to worry about the point loss. It almost sounds to me like it's counterproductive to even bother, considering it costs you points when it's opened then again when closed. lol

I can understand the new account and inquiry loss, but it shouldn't be a negative when it's piad off as well. Since Auto Loans are unavoidable for most people, we're bound to open a few in our lifetime. One might be able to avoid a personal Loan, however. 

At least it's only a few points though, anything under ten isn't that detrimental. 

[Anonymous]

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@Anonymous wrote:

Credit can be funny sometimes when you know you're doing the right things for your financial health you don't get recognized by the scoring models as doing so.  It's designed to love debt not good habits.

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Your last sentence is completely false.  Good habits include always making on-time payments and keeping [reported] utilization low.  Those good habits do not require any debt and take care of 2/3 of one's Fico scores. 

99% of the time less debt equates to greater Fico scores, with one of the rare exceptions being the paying off of an installment loan.  I don't have a problem with anyone arguing that one of these exceptions is silly, but let's not take it to the extreme and say that based on a few relatively rare examples that scoring models are designed to "love debt" or that good credit habits don't as a whole equate to better Fico scores the vast majority of the time. 

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

Credit can be funny sometimes when you know you're doing the right things for your financial health you don't get recognized by the scoring models as doing so.  It's designed to love debt not good habits.

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Your last sentence is completely false.  Good habits include always making on-time payments and keeping [reported] utilization low.  Those good habits do not require any debt and take care of 2/3 of one's Fico scores. 

99% of the time less debt equates to greater Fico scores, with one of the rare exceptions being the paying off of an installment loan.  I don't have a problem with anyone arguing that one of these exceptions is silly, but let's not take it to the extreme and say that based on a few relatively rare examples that scoring models are designed to "love debt" or that good credit habits don't as a whole equate to better Fico scores the vast majority of the time. 

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Well, if you don't have debt you can't make payments and that's the biggest factor being measured for a score...correct?  It accounts for 35% of your score.

Of course the next big ticket item is UTIL at 30%... but, 0% is worse than 1% which comes back to the statement of scoring loves debt.  Which is why when you factor in AZEO and you pick the wrong card to be the One part of the trick to get more points on you lose points for it being a store or charge card.

For a 10% category like creidt mix it seems to weigh heavier when it comes to no installment / mortgage reporting when you see a pop of 20+ points when someone adds a loan (debt) to their profile.  Correct?

So, if debt wasn't the core of scoring people w/ less debt would have the highest scores yet the guy living on cash has a crappy score in comparison to someone juggling 2 jobs to pay the mortgage and cars every month.  Sure someone can get a CC and make it report for 6 months which is the minimum requirement to generate a score and end up with a 700+ score with a fresh file.  

Debt = Score... well it equals a higher score than someone that lacks significant debt.  You can't get an 850 w/o debt of some sort and retain that score at the same time with everything paid in full.  We can trick the formulas with things like a SSL that's opened and immediately paid down to 8.9% to get those 20-30 points we're missing.  To win the game though you have to have extensive history of payments over a decade or more to statistically max out the formuia and snag that 850.

[Anonymous]

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@Anonymous wrote:

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Well, if you don't have debt you can't make payments and that's the biggest factor being measured for a score...correct?

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No, incorrect - You don't need to have debt or significant debt as you suggest.  You are confusing "debt" with making payments or reporting balances, both of which can be done without real debt.

I can have a handful of credit cards with all $0 balances reported except one that I buy a cup of coffee on every month.  That $3 reports and I pay off the $3 immediately.  I repeat the process every month.  In my book, that's not $3 of "debt" if it's always being paid in full every cycle.  It's 1 added step over using a debit card for the same single transaction.  This $3/mo payment takes care of 2/3 of my Fico score.  On-time payments and one small reported balance, maximizing utilization and providing perfect payment history.  No debt is needed.

Scoring doesn't "love debt" and your 1% being "better" than 0% is a bad example.  The algorithm needs to know that you're using revolving credit and unfortunately it can only do that by looking at reported balances.  Having a 1% reported balance verses 0% as I explained above though does not have to equate to debt.  But, even if you wanted to split hairs and make the argument that 0% is "worse" than 1%, you'd have far more arguments against your statement because 10% is worse than 1%, 30% is worse than that, 50% is worse than that, 70% is worse than that and 90% is worse than that.  If scoring "loved debt" wouldn't scores continue to increase as those utilization percentages went up?  

Debt does not = Score as you put it.  It does not equal a higher score than someone that lacks significant debt.  850 is irrelevant.  Someone with an 850 score can shave 75-100 points off of their score and still obtain the best credit products at the best rates.  Someone can achieve those top-tier scores without an installment loan and with just 1 credit card reporting a tiny balance... so you don't need debt to land there.

Fico scoring comes down to risk assessment.   The vast majority of the time greater debt is going to equate to greater risk and a lower Fico score.  A couple of silly examples that go against that don't outweigh the overwhelming statistical data that support it.  Take a sample size group of 10 million people that have an average score of 775 and another sample size group of 10 million people that have an average score of 625.  Which group do you think statistically possesses less debt?  

[Anonymous]

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@Anonymous wrote:

No, incorrect - You don't need to have debt or significant debt as you suggest.  You are confusing "debt" with making payments or reporting balances, both of which can be done without real debt.  

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You can't have payments without having debt. Whether it be a car loan, house mortgage, or a cup of coffee due at at the end of the month. Debt is debt. Your notion of "fake" debt versus "real" debt is where the real splitting hairs lie and where the falsehood lies. If you want to make a difference between a mountain and a mole hill, that's fine. But a spade is a spade. 

@Anonymous wrote:

Scoring doesn't "love debt"

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Pay off all of your debt, use cash for 10+ years, and after all of your accounts drop off, your score becomes undeterminable.

I also find it ironic how you dismiss a "couple of silly examples" even though they are factual examples.

[FinStar]

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