Credit score dropped after paying off personal loan?

[Anonymous]

You can only pay down debt so much until it’s paid... then your score drops because in the algorithm it takes it as a closed account.

[Anonymous]

And that closed account costs you points, even if the lender is reporting it as an Open Account (as a credit card issuer would). As I said, FICO hates it when you don't actually owe anybody anything.

[Anonymous]

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@Anonymous wrote:

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FICO's sweet spot for giving points seems to be between 1% and 3%. Go above that or below that and you will lose points. Apply for, take out or pay off any installment loan you will lose points. Paying an Installment Loan down to some "sweet spot" percentage of the original balance has no effect on FICO. 

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It sounds like you're speaking on simply personal experience, but if that's the case your experience doesn't match the majority.  Going above 3% (but under 9%) or going below 1% (but not $0) on most profiles doesn't cause people to "lose points."  Perhaps there are some exceptions like your case, but that's not the norm.  "Pay off any installment loan and you will lose points" is an incorrect statement.  If someone has multiple installment loans and paying off an installment loan keeps aggregate installment loan utilization at the same level or possibly improves it, score would likely remain the same or under some circumstances actually increase from the paying off of an installment loan.  In addition to the installment loan utilization, it would also mean one less account with a balance.  Finally, you state that paying an installment loan down to some sort of sweet spot has no effect on Fico.  This is another statement that many will argue is incorrect.  Take member SJ, for example, who found the "sweet spot" to be 8.9% for installment loan utilization, similar to revolving utilization.  When he crossed that threshold, I believe he picked up around 20 points on his Fico scores.

[Anonymous]

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@Anonymous wrote:

As I said, FICO hates it when you don't actually owe anybody anything.

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Well to be fair, the system is based on credit... credit is borrowing, so by definition that means you owe something.  If you don't owe anything, you aren't using credit, so it would be quite difficult for a Fico scoring algorithm to try and gauge risk and assign a score to that.

It's also important to understand that one doesn't have to owe anybody anything to achieve top-tier Fico scores.  For example, just because someone has a reported balance on a revolver doesn't mean they owe anyone anything.  The balance reports, a person pays it off, they owe nothing, but the algorithm still considers that reported balance for the next ~30 days. 

[lloyd1981]

I must agree.

I posted a few minutes ago about rebuilding credit (the post disappeared after I edited it - a notice that if it passed review it would be posted).

One thing "unliked" - any small loan company loan. I took out a "bridge" loan for six months, paid regularly, paid it off before the six months, and it showed up in the problem column for 10 years.

One issue that burns is that I may pay clean an account balance of a few hundred dollars and gain 1 point, but let a $16.00 charge for gasoline stay on your account until the due date, where the previous report showed $0, and I will lose 4 or 5 points.

And like almost everyone here, have gone through the BIG DROP by paying off a car note.

Bad.

News.

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

As I said, FICO hates it when you don't actually owe anybody anything.

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Well to be fair, the system is based on credit... credit is borrowing, so by definition that means you owe something.  If you don't owe anything, you aren't using credit, so it would be quite difficult for a Fico scoring algorithm to try and gauge risk and assign a score to that.

It's also important to understand that one doesn't have to owe anybody anything to achieve top-tier Fico scores.  For example, just because someone has a reported balance on a revolver doesn't mean they owe anyone anything.  The balance reports, a person pays it off, they owe nothing, but the algorithm still considers that reported balance for the next ~30 days. 

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To be even fairer, for a system that is designed to remember every missed payment one has for the past 7 years, one would think that the system could remember that you had a credit card balance last month, see that you don't have a balance this month and actually deduce that you did the RIGHT thing and paid the bill. When a dog does the right thing we give it a reward. When people do the right thing they get penalized by a lowering of a credit score. It makes no sense to reward good behavior with FICO points for every payment towards a debt except the last one.  Maybe that's why dogs don't have credit cards.

[Anonymous]

I don't disagree that trended data should be used in a future Fico scoring model; no doubt it would fix this minor quirk with the system.  I disagree that people doing the "right thing" lowers your credit score.  Again, this is an extremely minor quirk and in 99% of cases it isn't an issue.  If someone is using their cards every month and paying off their statement balance in full, they're "doing the right thing" and will never take on a no revolving credit use penalty as they'll always have a balance reported.  So, 99% of the time "doing the right thing" doesn't result in a score drop. 

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

As I said, FICO hates it when you don't actually owe anybody anything.

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Well to be fair, the system is based on credit... credit is borrowing, so by definition that means you owe something.  If you don't owe anything, you aren't using credit, so it would be quite difficult for a Fico scoring algorithm to try and gauge risk and assign a score to that.

It's also important to understand that one doesn't have to owe anybody anything to achieve top-tier Fico scores.  For example, just because someone has a reported balance on a revolver doesn't mean they owe anyone anything.  The balance reports, a person pays it off, they owe nothing, but the algorithm still considers that reported balance for the next ~30 days. 

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To be even fairer, for a system that is designed to remember every missed payment one has for the past 7 years, one would think that the system could remember that you had a credit card balance last month, see that you don't have a balance this month and actually deduce that you did the RIGHT thing and paid the bill. When a dog does the right thing we give it a reward. When people do the right thing they get penalized by a lowering of a credit score. It makes no sense to reward good behavior with FICO points for every payment towards a debt except the last one.  Maybe that's why dogs don't have credit cards.

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You’re forgetting that FICO scores are meant for lenders to be able to assess the risk that a consumer poses in the moment that the score is pulled. The fact that you paid off debt doesn’t demonstrate that you still have the ability to do so. FICO seems unfair because it’s not meant to be for the consumer to begin with. It’s a tool for the lenders to use in their total UW arsenal to help assess risk and nothing else. 

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

As I said, FICO hates it when you don't actually owe anybody anything.

---

Well to be fair, the system is based on credit... credit is borrowing, so by definition that means you owe something.  If you don't owe anything, you aren't using credit, so it would be quite difficult for a Fico scoring algorithm to try and gauge risk and assign a score to that.

It's also important to understand that one doesn't have to owe anybody anything to achieve top-tier Fico scores.  For example, just because someone has a reported balance on a revolver doesn't mean they owe anyone anything.  The balance reports, a person pays it off, they owe nothing, but the algorithm still considers that reported balance for the next ~30 days. 

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To be even fairer, for a system that is designed to remember every missed payment one has for the past 7 years, one would think that the system could remember that you had a credit card balance last month, see that you don't have a balance this month and actually deduce that you did the RIGHT thing and paid the bill. When a dog does the right thing we give it a reward. When people do the right thing they get penalized by a lowering of a credit score. It makes no sense to reward good behavior with FICO points for every payment towards a debt except the last one.  Maybe that's why dogs don't have credit cards.

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You’re forgetting that FICO scores are meant for lenders to be able to assess the risk that a consumer poses in the moment that the score is pulled. The fact that you paid off debt doesn’t demonstrate that you still have the ability to do so. FICO seems unfair because it’s not meant to be for the consumer to begin with. It’s a tool for the lenders to use in their total UW arsenal to help assess risk and nothing else. 

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That's what I said above - you would think that the FICO algorithm would reason that since a person no longer has to pay a $600 car payment (or a $1500 mortgage payment) you could reasonably assume that the ability to pay any remaining debts has been increased by the freeing of of an additional $600 or $1500 a month.  The payment in full of one debt DECREASES the risk that all remaining creditors have.

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

As I said, FICO hates it when you don't actually owe anybody anything.

---

Well to be fair, the system is based on credit... credit is borrowing, so by definition that means you owe something.  If you don't owe anything, you aren't using credit, so it would be quite difficult for a Fico scoring algorithm to try and gauge risk and assign a score to that.

It's also important to understand that one doesn't have to owe anybody anything to achieve top-tier Fico scores.  For example, just because someone has a reported balance on a revolver doesn't mean they owe anyone anything.  The balance reports, a person pays it off, they owe nothing, but the algorithm still considers that reported balance for the next ~30 days. 

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To be even fairer, for a system that is designed to remember every missed payment one has for the past 7 years, one would think that the system could remember that you had a credit card balance last month, see that you don't have a balance this month and actually deduce that you did the RIGHT thing and paid the bill. When a dog does the right thing we give it a reward. When people do the right thing they get penalized by a lowering of a credit score. It makes no sense to reward good behavior with FICO points for every payment towards a debt except the last one.  Maybe that's why dogs don't have credit cards.

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You’re forgetting that FICO scores are meant for lenders to be able to assess the risk that a consumer poses in the moment that the score is pulled. The fact that you paid off debt doesn’t demonstrate that you still have the ability to do so. FICO seems unfair because it’s not meant to be for the consumer to begin with. It’s a tool for the lenders to use in their total UW arsenal to help assess risk and nothing else. 

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That's what I said above - you would think that the FICO algorithm would reason that since a person no longer has to pay a $600 car payment (or a $1500 mortgage payment) you could reasonably assume that the ability to pay any remaining debts has been increased by the freeing of of an additional $600 or $1500 a month.  The payment in full of one debt DECREASES the risk that all remaining creditors have.

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It doesn’t decrease the risk though because now there is no consistent payment going through that shows you still have the income. This is definitely something that will be addressed (although I personally can’t see the changes being better for the consumer at all) with trending data but since FICO takes a snapshot of risk at one specific time, history means nothing. Only the present is used to predict the future by these algorithms.