Paid off Auto Loan lowers score?

[TheDude]

I recently paid off a 5-year auto loan about 1 year early.  The payoff was about $6,000.  My score dropped 6 points from 743 to 737 on the day I received this alert.  Why would this happen?  I thought paying off debt would be a good thing.

[Anonymous]

Be glad it was only 6 points. Many have seen a far larger drop when a loan reports paid.

[CH-7-Mission-Accomplished]

Honestly, we need to put a header or footer on every page of myFICO that says "Paying off your auto loan will drop your score by 5 to 25 points."  This comes up almost every day!

[TheDude]

So is there some other reason why it goes down?  Having less debt / paying off loans seems like a reason to raise your score.

[Anonymous]

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@TheDude wrote:

So is there some other reason why it goes down?  Having less debt / paying off loans seems like a reason to raise your score.

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Credit mix is part of the score. Not having an open installment loan reduces the mix.

[redbeard]

There are a lot of components to a credit score, more than most people want to know about.  One of them is the mix of credit types that you have, credit cards, installment loans (auto), mortgage, etc.  Having your auto loan paid off and reporting closed changes the mix a bit.

I went through the same thing when I paid off my student loans.  I expected a score bump, the simulators said I would get a 20 point bump, instead, I got about a 10 point decrease.  In the end though, I was glad to have the loan paid off.  I've gotten those 10 points back and a whole lot more.  

Enjoy being debt free on your car!

Dan

[StartingOver10]

Agree with Dan. ^^  Better to have less debt and a temporary drop in score than more debt IMO.

[EW800]

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@redbeard wrote:

Enjoy being debt free on your car!

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I agree!  I have not had an open car loan in about 3-1/2 years (2 closed auto loans show on my reports).  While I know this is not ideal scoring wise, in my case I find it much better to go so long with no car payment.  

[tntexans72]

I paid mine off in 2yrs, my score dropped about 10-12 points across the board...you will gain it back in a few months. 

[Revelate]

Pretty much any installment loan including a simple $500 share secured loan solves the point issue.

I find it highly amusing (cynically) that apparently my $500 Alliant loan was worth just as much in the FICO algorithm as my brand spanking new mortgage.   Anyway to maximize scoring need to have open accounts both revolving and installment, and want them reporting as pretty as possible.  I understand the open credit card bit, but FICO lost me at including a mortgage in that calculation but oh well.

Can get to 800 without a mortgage so it's not like having one that is reporting clean but with an ugly ratio isn't going to hurt me long term.