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I finally understand why scores drop at all-zero or when loans are fully paid

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BuckyB
New Contributor

I finally understand why scores drop at all-zero or when loans are fully paid

After a ton of reading I finally grok it.  It's simply because lenders are no longer able to monitor the consumer's behavior.  When you're paying down a loan, you're giving your credit reports a constant flow of information about you.  Each time a statement posts, it's a recent "check in" with the consumer which gives lenders a limited but important view into the person's financial circumstances and, indeed, mental state through his ongoing payment behavior. 

 

Once everything is paid down to zero and there's no more activity on those tradelines, there's no way to monitor the person.  He's now essentially a black-box with no behavioral data coming out so who the hell knows what's up with him? Might be good, might be bad, you just don't know.  And it's this lack of information that causes the risk increase and the score drop.  It's not that "people who just paid off a loan are more likely to default in the future," it's simply the fear of the unknown.

 

It's like if a hornet flies into your open car window as you're driving on the highway.  It's a stressful situation but if you can see the hornet walking around on your dashboard, at least you know what it's doing.  If it flies into the back seat area and suddenly you can't see it and you don't know what the hell it's up to, it's much more stressful for you.

Message 1 of 15
14 REPLIES 14
Thomas_Thumb
Senior Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid

Not sure I would use your logic as an explanation but, my highschool mascot was a hornet. Go hornets!

Fico 9: .......EQ 850 TU 850 EX 850
Fico 8: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
Fico 8 BC:. EQ 892 TU 900 EX 900
Fico 8 AU:. EQ 887 TU 897 EX 899
Fico 4 BC:. EQ 826 TU 858, EX Fico 98 BC: 870
Fico 4 AU:. EQ 831 TU 872, EX Fico 98 AU: 861
VS 3.0:...... EQ 835 TU 835 EX 835
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 2 of 15
markbeiser
Established Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid

Nah, it is just a penalty for being a bad debt slave, you can't be going around not owing banks money!🤪

Back to gardening until Late February 2025.
Current FICO8:
Message 3 of 15
BuckyB
New Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid


@Thomas_Thumb wrote:

Not sure I would use your logic as an explanation but, my highschool mascot was a hornet. Go hornets!


Can't say I'm surprised, you haven't agreed with me once on these boards!  😛

Message 4 of 15
Horseshoez
Senior Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid

Not buying your explanation either.  Reviewing my most recent credit report from each bureau I see a notation for "Last Payment Made" and a date for each of my accounts; looking at two cards, one which is a daily driver (DD) and one which is in the proverbial sock drawer (SD), I see the following:

  • DD: Last Payment Made: 22-Dec-2023
  • SD: Last Payment Made: 15-Jun-2023

So yeah, the bureaus can easily see whether a card gets usage regardless of whether it has reported a recent balance no balance at any time.

 

Chapter 13:

  • Burned: AMEX, Chase, Citi, Wells Fargo, and South County Bank (now Bank of Southern California)
  • Filed: 26-Feb-2015
  • MoC: 01-Mar-2015
  • 1st Payment (posted): 23-Mar-2015
  • Last Payment (posted): 07-Feb-2020
  • Discharged: 04-Mar-2020
  • Closed: 23-Jun-2020

 

I categorically refuse to do AZEO!

In the proverbial sock drawer:
Message 5 of 15
BuckyB
New Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid

Ok, well, you guys figure it out then.  I'm sticking to my explanation because it makes sense to me. ¯\_(ツ)_/¯

Message 6 of 15
Pppoolboy
New Member

Re: I finally understand why scores drop at all-zero or when loans are fully paid

well I dont see anyone else offering any good explanations so Buck's is it AFAIK

Message 7 of 15
GZG
Valued Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid

I'm just willing to take it at face value that FICO has determined when borrowers don't have open loans or balances on their revolving accounts, they are slightly riskier borrowers, it's nothing personal, just what the math says.

Starting FICO 8:

Current FICO 8:

3/6, 5/12, 14/24

Message 8 of 15
Thomas_Thumb
Senior Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid

Fico absolutely penalizes for no recent revolving activity. No recent activity translates to less predictable future behavior. CRA data over the years as statistically analyzed by Fico using ANOVA and other methodologies indicated it was significant. 

 

The big flaw is that many profiles tagged with no recent revolving activity have recent revolving activity. Using a zero balance as a designator of no activity is a false indicator for many accounts. Specifically those where balances were paid to zero before statement cut date.

 

Using payment data in combination with balance amounts could accurately determine activity. The problem is monthly payments are not required to be reported and often just show $0. Therefore that field can't be used as a sign of activity.

 

@BuckyB 

You were on the right track with your reasoning. If you do a search you would find this topic has been discussed ad nauseam in years past. I would just explain it differently - Go Hornets!

 

 

Fico 9: .......EQ 850 TU 850 EX 850
Fico 8: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
Fico 8 BC:. EQ 892 TU 900 EX 900
Fico 8 AU:. EQ 887 TU 897 EX 899
Fico 4 BC:. EQ 826 TU 858, EX Fico 98 BC: 870
Fico 4 AU:. EQ 831 TU 872, EX Fico 98 AU: 861
VS 3.0:...... EQ 835 TU 835 EX 835
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 9 of 15
Horseshoez
Senior Contributor

Re: I finally understand why scores drop at all-zero or when loans are fully paid


@Thomas_Thumb wrote:

 

The big flaw is that many profiles tagged with no recent revolving activity have recent revolving activity. Using a zero balance as a designator of no activity is a false indicator for many accounts. Specifically those where balances were paid to zero before statement cut date.

 

 


My profile more or less fits the scenario you mentioned about twice per year; I just looked and in 2023 I ran about $18,000 through one card and another $10,000 through another; the first card usually has a balance of about $50 reported monthly, the second card has never had a balance reported on it during the nearly three years I've had it.  And what happens those other two months?  The first card reports a zero balance because the latent charges which typically get reported before the statement cut showed up a day or two later, and my scores took a 20+ point hit for a month.

 

With the above said, and as I mentioned in a previous post, the CRAs have enough data to know a card isn't really dormant.

Chapter 13:

  • Burned: AMEX, Chase, Citi, Wells Fargo, and South County Bank (now Bank of Southern California)
  • Filed: 26-Feb-2015
  • MoC: 01-Mar-2015
  • 1st Payment (posted): 23-Mar-2015
  • Last Payment (posted): 07-Feb-2020
  • Discharged: 04-Mar-2020
  • Closed: 23-Jun-2020

 

I categorically refuse to do AZEO!

In the proverbial sock drawer:
Message 10 of 15
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