So in the past few months I've realized how odd the FICO scoring can be. Back in November my wife and I paid off a vehicle on her CR and it lowered her scores by as much as 30 points. Just today my PIF Mortgage popped up on my CR and it lowered my score. Now I'm curious to see once our new mortgage is reported to see if raises our scores accross the board. Very very goofy from my perspective.
@trusty wrote:
@Anonymous wrote:FICO requires that you have at least one open installment loan to get a good "credit mix" portion (10% of FICO score).
To get the most FICO points back, your loan needs to be at some balance below the original balance but the % varies on mortgages, auto and personal/student loans.
Paying off one mortgage that is say 85% remaining due will tank your scores if you have no other installment loan, but if you get a new mortgage with 100% remaining due you'll only get some of those points back until the new loan is aged and paid down a bit.
I actually did some research on this back in September and found there is evidence that people who pay off ALL installment loans have a higher likelihood of default later because they tend to increase consumer spending on credit cards assuming they're in better shape without the loan! It's not a significant difference but it does exist, and FICO's analyses of billions of reports have them finding the correlation between paying off loans and increasing credit card debt, raising the risk of default.
FICO isn't about how well you have paid debt, it's about an instant review of how likely you are to default on debt in the future.
I'd like to see the data on this, because it sounds like a false assumption. The only assumption you can make with someone that pays off a mortgage early is that they are in excellent financial condition; which is indicative of being bright enough not to then go off and rack up undue credit card debt... as, they don't exactly have much use for credit cards, since they have just proven that they have excess cash.
So, if they do use credit cards, they are also smart enough to pay that off. To wit: If they can handle paying off several hundred thousand on a mortgage, they can certainly handle a few thousand here or there on a charge account.
It doesn't very well make financial sense to have installment loans open in perpetuity; but, it somehow makes for great credit scoring?
This is just a case of a flaw in the scoring system, that doesn't reward paid/closed installment accounts nearly enough. If they just kept the account open forever, the credit scoring would be fantastic. But, of course, that is nigh impossible, without deliberate gaming.
That's my feeling as well. My thought would be that high credit worthiness would be determined on the ability to PAY OFF accounts rather than keeping and holding onto debt. It doesn't make sense to be dinged for being financially responsible.
Thank you for your input!
@Anonymous wrote:Rewarding paid/closed installment accounts would be a terrible move for the FICO algorithm. You'd actually have more gaming going on then, as people instead of employing the SSL technique once would do it a dozen times so that they'd have a dozen paid/closed installment accounts on their credit report if it meant getting extra points each time. THAT wouldn't make any sense.
I'd argue I could just as easily game the system by opening an SSL/Self Lender/some other secured loan with paltry interest just prior to paying off a loan so I always have at least one installment account open. I understand FICO's algorithm is based on big data, but I just think it ridiculous that the more financially responsible you are, the more you have to game the system just to maximize your score. Then again there's probably an argument to be made about not conforming to the norm or being the 0.01%.
trusty wrote:This is just a classic case of being kindly nudged into participation in debt system that only rewards consumers that can be monetized.
If you're not in debt, we cannot very well make money off of you; by selling your data, selling your scores, nor by making any interest off of you. It's a trifecta of going dark and effectively dropping out of the game. So, they effectively penalize financial responsibility by unduly rewarding participation in unnecessary debt. Of course, it only makes sense if you're deliberately gaming. Otherwise, it's highly likely that by participating in debt in perpetuity, you will eventually default.
Thusly, it makes perfect sense, and no sense at all.
As I said above, when you don't conform to the norm and fall into the 0.01%, expect certain repercussions. So yes I feel the same way sometimes, but this is why this community exists to teach you all kinds of tricks to turn the system on its head. 
And think of it this way: isn't it wonderful when you're in full control of your finances, and make the system work for you instead of the other way around? BoA has paid me over $1500 for the privilege of having their card in the last 5 years, and I paid exactly $0 in interest. Likewise this year I've already received $172 in cash back (will get matched to $344 after a year) from Discover after only having their card for 1.5 months. Getting paid to use credit is pretty sweet eh.
