How does paying off a $3200 balance decrease scores???

[Angieh]

I paid off a $3200 balance on my car to a $0 balance and my 3 scores decreased by 19 , 17 and 5 points!!!! How is this possible? I have never been late on this car and I am baffled how this is happening! Everything I have read states paying off balances increases your scores.... I am totally devastated by this.
I just purchased my first home in August and expected my score to take a hit but never did I expect paying off a car to do this much damage....
All the info I can get would be helpful!!!

[Anonymous]

This has been known for years.  FICO wants to see at least one open loan -- with the most points being when the loan has less than 8.9% left to pay (but not $0).

If you open a new loan, you will owe 100% so you may get back a few points but you won't get the full value back until the loan balance is less than 8.9% of the opening loan amount.

[kxkxkxx]

Hi AngieH....seems stupid right? You're responsible, pay something off and thinking it will boost your score...but nope....FICO punishes people that are debt free...it' a fixed game.

That same scenario happened to me as well when it came to a Lending Club loan...I paid it off 2 yrs early thinking I would be a FICO rockstar...nope...score dropped....

The only debt you can play the score game with are credit cards....the forum here will let you know all of that AZeO etc.

But when it comes to cars, personal loans, etc....they treat them differently. Even though you cannot control the account being closed after it has been paid in full, it closes anyway, and FICO looks at that the same way as closing a credit card and dings you....it's not fair, not cool, but the way they built it.

[HeavenOhio]

Welcome @Angieh

There's a FICO8 penalty if you have no open installment loans. But because your mortgage counts as one, you shouldn't be seeing that particular hit.

Scoring for installment loans is based on the cumulative amount owed on all loans vs. the original loan balances. While it's not an "official" term, we often call that "installment utilization" here on the forums. You've gone from low installment utilization to high installment utilization. You didn't do anything wrong. It's just the nature of the beast.

As mentioned, FICO8 likes it when your installment utilization is less than 8.9%. But the gurus here feel that you'll gain points back on your mortgage well before paying down to 8.9%. It could have to do with paying down a specific portion of your mortgage, or it could simply be due to the passage of time.

The gurus here can probably offer up a specific post mortem if you can provide the original amount of the car loan, the approximate date when the mortgage reported, and the approximate date the the car loan reported as paid off.

[Angieh]

Thanks so much.. 

It was a little hard to see when I just puchased a House, paid off a car and purchased a new car.. Prayerfully I can get back to where I was and above.

[Anonymous]

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@Angieh wrote:

Thanks so much.. 

It was a little hard to see when I just puchased a House, paid off a car and purchased a new car.. Prayerfully I can get back to where I was and above.

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Everyone here is very helpful and will do wonders in helping you to "understand" what is nearly impossible to understand.  Fortunately, it sounds like you're in a really good place with a new home, new car, and paid off car.  Thus, the hit your scores have taken will have a good opportunity to rebound and you're not suffering from an inability to make the recent purchases you've concluded.  You will be just fine and you will learn a lot here.  Looking forward to reading your future posts and successes!

[Anonymous]

The OP did not take a score hit from paying off the car loan.  If the new home loan was taken on in August, it probably landed on their credit report sometime in the last 30 days.  At that time, it probably took what was low overall installment loan utilization to high (99%-100%) installment loan utilization.  This is the reason for the score drop.

kxkxkxx your reply above is quite misleading and you should reconsider it.  The whole FICO punishes people that are debt free and/or rewards people that have debt argument here doesn't hold water.  If that were really the case, the OP using that rationale would have seen a score increase from dramatically increasing their debt.  We know that is not the case.

[SouthJamaica]

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@Angieh wrote:
I paid off a $3200 balance on my car to a $0 balance and my 3 scores decreased by 19 , 17 and 5 points!!!! How is this possible? I have never been late on this car and I am baffled how this is happening! Everything I have read states paying off balances increases your scores.... I am totally devastated by this.
I just purchased my first home in August and expected my score to take a hit but never did I expect paying off a car to do this much damage....
All the info I can get would be helpful!!!

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1. Paying off a loan does NOT increase your scores, so I don't know what you've been reading, but you haven't been reading this forum

2. In your case, the new mortgage may have been the reason for score decrease.

[SouthJamaica]

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@Angieh wrote:

Thanks so much.. 

It was a little hard to see when I just puchased a House, paid off a car and purchased a new car.. Prayerfully I can get back to where I was and above.

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Now you're throwing in even more information, the purchase of a new car.

[kxkxkxx]

@brutalbodyshots

Not really misleading, speaking from experience....when I pay down credit cards, my score jumps...when I pay off installment loans early, my score drops (thus my punishment comment)...FICO wants to see you pay "some kind of debt"...if there is nothing on the books, nothing to report...which is a shame IMO.