This past month, we paid off one of our unsecured signature loans with the credit union. Today, I received an alert from myFICO and it told me that my score dropped and under the alert is the paid off loan. How can a paid off loan DROP your credit score?
When balance reaches $0 for a loan, you get a hit, but it will recover in time. FICO does not like $0 balance in anything.
There has been a lot of confusion surrounding similar issues, so I figured It's time we clarified a little about how report changes correspond to score changes.
The way Score Watch works is this:
It monitors your credit report constantly thought it lags behind a little bit from real time. What this means is that if, say today, your credit card reports a new balance to Equifax, a few hours after that, Score Watch will detect the change to the report and send you an alert.
But on the other hand, Score Watch does not constantly monitor your FICO score. It checks your FICO score when a reportable event is detected such as the new credit card balance, or if there is no reportable event for a week, it will check your FICO score a week from the last time a new FICO score was reported to you.
As a result of that, the reportable event is not the only contributor to a FICO score change. For example, say, today your FICO score was reported to be 700. In the next week, 3 inquiries fall of your report, and then a new credit card balance is reported. The 3 inquiries falling off certainly brought your FICO score up, but since it is not a reportable event, Score Watch will not check for a new FICO score and will not give you an alert. However, when the new credit card balance shows, Score Watch will immediately check for an updated score and report both the new balance AND the new score to you. Now, the new score reflects both the new credit card balance and the aging of the inquiries, but because you see the new score reported at the same time as the balance, you misinterpret the coincidence as one being the only cause for the other.
So, to apply this to your particular situation, one explanation is that something else probably happened to your credit report before the secured loan was paid off that brought down your score. Another possible explanation is that you got rebucketed. If you don't understand bucketing for FICO scoring purposes, either search around this board, or ask and wait for someone to explain the concept to you.
