Credit score dropped after paying off personal loan?

[Anonymous]

---

@Anonymous wrote:

---

---

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.

---

But what matters is the ability to repay debt today, not what one was able to repay a month ago or longer.  Someone could pay off their loan and the day they do so lose their job, effectively dropping their income to $0.  In such a situation, their ability to pay off their debts after their loan was paid off may actually decrease. 

Also keep in mind that the points lost associated with a score drop due to closing an only installment loan are related to the Amounts Owed sector of the Fico pie, not the loss of "credit mix" which is still satisfied whether or not the loan is open or closed.  A scoring benefit therefore is still realized with a closed installment loan relative to not having a closed installment loan, so in that respect "history" is indeed considered. 

[Anonymous]

---

@Anonymous wrote:

---

@Anonymous wrote:

---

@Anonymous wrote:

---

@Anonymous wrote:

---

@Anonymous wrote:

---

@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. 

---

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.

---

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. 

---

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.

---

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. 

---

Like I said, FICO has a long memory for a consumer missing payments but has no memory of payments made on time. It is a stacked deck and it is stacked against the consumer. Make 1,000 payments on time and you get at bets a handful of points - miss one payment by 2 days and you can lose 100 points.

[Anonymous]

---

@Anonymous wrote:

---

---

Like I said, FICO has a long memory for a consumer missing payments but has no memory of payments made on time. It is a stacked deck and it is stacked against the consumer. Make 1,000 payments on time and you get at bets a handful of points - miss one payment by 2 days and you can lose 100 points.

---

Incorrect information above.  One must miss a payment by 30 days in order for it to be reported as such and impact Fico scoring.  A payment missed by 2 days cannot cause someone to lose 1 point, so definitely not 100.

Payments made on time are a minimum expectation of borrowing.  You don't get extra points for doing what you're supposed to do.  Making 10 on-time payments or 1000 on-time payments is a non-factor and not used in Fico scoring.  What matters is if one misses a payment.  Someone that misses a payment is a higher risk to miss another in the future, so it makes perfect sense that they'd be considered for a length of time, which of course is currently 7 years.  Again, it's all about assessing risk.

[Anonymous]

A quick illustration to follow up on my number of on-time payments comments in the previous post.

Cornelius has exactly 4 years of credit history.  He's got 10 total accounts, all of which were opened in the first 2 years.  He's got a total of 380 on-time payments over this span of time.  He's missed (30 days late) 2 payments over this same time period.  

Rupert also has exactly 4 years of credit history.  He's got 4 total accounts, basically opening one every year.  He's only got a total of 40 on-time payments over this span of time.  He's never missed a payment.

Who do you think stands the greatest chance statistically of missing a payment going forward, Cornelius missing his 3rd or Rupert missing his 1st ever?  Looking at this illustration one can see that having nearly 10x the on-time payments means nothing in terms of default risk and without question with these two profiles being otherwise equal the person with 10x the on-time payments will possess lower Fico scores.