My score went down 30 points because I paid off my mortgague

[markincleveland]

I used to have a high FICO score, around 833. I paid off my home mortgage and my score sent down 30 points to 802. The only other installment loan I have is a $14,000 three-year auto loan. that I owe about 50% of the original amount.with no late payments. I never use more than 3% of my total available credit card availability, which is very substantial. I have never had a late payment and have no negative information on any of my reports. When I look at the reason for the drop in my credit report is says "Proportion of loan balances to loan amounts is too high". I do get stung because I have too many inquiries, but even with that, my score was 832. I may be an idiot but I can't understand how reducing my debt should affect my score so negatively. If I pay off my auto loan will my score go down more? This makes no sense to me.

[Anonymous]

If your mortgage was extremely close to being paid off, say it was at 1% utilization, your overall installment loan utilization was also extremely small even with the auto loan included, as no doubt your original mortgage balance was significantly higher than your auto loan.  Perhaps with your mortgage at 1% utilization, your overall installment loan utilization was 7% for example when factoring in your auto loan with it.  The point here is that your aggregate installment loan utilization was in the ideal range of 1%-8.99% more than likely.

Once your mortgage reports closed, you now only have your auto loan.  Your aggregate installment loan utilization goes from say 7% to 50%.  This is a reason why your score dropped.  I say "A" reason not "THE" reason, because I don't believe you'd see a 30 point drop from this alone.  It's possible I suppose, but I would expect maybe a 20 point from that utilization change.  A 30 point drop is usually the difference between going from ideal installment loan utilization to NO open installment loan, or possibly opening one that's still at 100% utilization that just reported for the first time.

[Appleman]

FICO scores are not an indicator of fiscal health. Instead they are an indicator of how you are currently managing debt and credit. 

I would say not owing a mortgage is a very strong indicator of fiscal health so congrats. The other thing, I doubt you have any benefit having a score of 832 verus a score of 802 when it comes to applying for new credit. 

[SouthJamaica]

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@markincleveland wrote:
I used to have a high FICO score, around 833. I paid off my home mortgage and my score sent down 30 points to 802. The only other installment loan I have is a $14,000 three-year auto loan. that I owe about 50% of the original amount.with no late payments. I never use more than 3% of my total available credit card availability, which is very substantial. I have never had a late payment and have no negative information on any of my reports. When I look at the reason for the drop in my credit report is says "Proportion of loan balances to loan amounts is too high". I do get stung because I have too many inquiries, but even with that, my score was 832. I may be an idiot but I can't understand how reducing my debt should affect my score so negatively. If I pay off my auto loan will my score go down more? This makes no sense to me.

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1. Bear in mind that you're only talking about FICO 8. The more important scores, your mortgage scores, don't react that way.

2. The loss in FICO 8 points occurred because when you paid off your mortgage you took the huge denominator in the fraction of overall installment utilization and shrunk it to $14k. You can get all the points back, if you care, by paying the auto loan down to 9%, or $1260.

3. PS It makes no sense to me either, but it is what it is.

[markincleveland]

I hear what you said but my credit report says I have $530,000 of available credit and my mortgage was only $14,000 when I paid it off. I'd been in the house 33 years.  It was a trivial number.

[markincleveland]

Thanks for your reply. You're right

It's just the principle of it all. 

[markincleveland]

Thanks for the reply. I've heard that taking out a large installment loan and paying it down immediately and then just make the minimum payment until it's paid off should help my score. I can get a $50,000 installment loan, with a 6-year term at prime. and immediately pay it down to say $1,500 and then make the minimum payments for the balance of the term. Should that help? I thought about paying off my auto loan but that makes no sense. Then I would have no installment debt. 

[Anonymous]

If you are eager to regain the points ASAP, then as SouthJ explained you have a simple route to do that, which is to reduce the amount you owe on your open loans to < 9%,  Since you have only one open loan right now, that means reducing the amount you owe to 8.9% of the original amount of the loan (as it is listed on your credit report).  When you get close to paying the loan off, we can suggest another technique.

But there's a useful question at this point, which is why would you be in such a hurry to regain those points?  Your score is 802.  That is substantially higher than you need for anything.  Whether you have a 790 or an 850, all lenders will consider those scores the same in terms of what they will gives you as far as interest rates or credir cards,

You will eventually get your points back when the auto loan balance gets a lot smaller, so why worry about it?

[SouthJamaica]

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@markincleveland wrote:

I hear what you said but my credit report says I have $530,000 of available credit and my mortgage was only $14,000 when I paid it off. I'd been in the house 33 years.  It was a trivial number.

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Your mortgage may have had a balance of 14k when you paid it off, but that was in the numerator part of the fraction. The denominator -- the bottom part -- consisted of the original amount of the mortgage + the original amount of the car loan.

[SouthJamaica]

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@markincleveland wrote:

Thanks for the reply. I've heard that taking out a large installment loan and paying it down immediately and then just make the minimum payment until it's paid off should help my score. I can get a $50,000 installment loan, with a 6-year term at prime. and immediately pay it down to say $1,500 and then make the minimum payments for the balance of the term. Should that help? I thought about paying off my auto loan but that makes no sense. Then I would have no installment debt. 

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It depends on the lender; some report it in a way that will help your scores, some don't. But in your case it makes no sense to do that, since you already have the car loan. Just pay the car loan down to 9% and you're good if the lender reports it in the helpful way.