Paid off Loan ... but score drops

[nupey10]

I get an email from myfico saying there has been a change to my Exp report.  

I log in to see that my auto loan now show PAID and $0 balance because I am refinancing with another bank

The other bank is not listed on the report yet.

My EXP Fico score has dropped 5 points because of the PAID balance.  

Anyone have any insight as to why a paid off loan would drop my score?

Thanks in advance

[newhis]

Because the score evaluates risk.

The algorithm evaluates a person ability to pay.

For it is easier to 'see' a loan that is paid monthly than no loan at all.

My guess is that more people that start a loan from no loan get into trouble than people that already have a loan and pay it every month, that's why you get 5 points extra for having a loan (in your case), than now not having a loan.

It also changes if the loan is at 100% or 50% or 5%, you get some points just for having a loan and more points if your loan is mostly payed.

EDIT: last month I opened a SSL just to have an open loan in my reports. There are many reports that not having an open loan on a good profile vs having a mostly paid loan is a 30 points difference in score. In a few days up to 2 weeks I'll see how much it helps my score.

[nupey10]

Thanks for the response.  What's happening is that I refinance my truck.  Ford has zeroed out the loan but the credit union loan part of the refinance has not appeared yet.  I wonder if this will be a double whammy when it does appear ( new loan - lower AAoA - no history)

[Anonymous]

Is this your only installment loan?

We can't answer your question without knowing whether you have any other open installment loans and if so what they are.  Without knowing the details, the answer is that the final result of the refi could hurt your score or not.

Here what we'd need:

Loan 1.  Balance currently owed = ________.  Original amount of loan = _________.

Loan 2.  Balance currently owed = ________.  Original amount of loan = _________.

Loan 3.  Balance currently owed = ________.  Original amount of loan = _________.

etc.

Let us know for each loan whether it is a car loan, a mortgage, a personal loan, a student loan, a finance company account, etc.

Then tell us the same info for the new car loan (which has not yet appeared)

      NEW CAR.  Balance currently owed = ________.  Original amount of loan = _________.

(Presumably the two dollar figures will be the same, since you have just done the refi.)

And finally the info for the old car loan that was just paid off:

OLD CAR.  Balance currently owed = ________.  Original amount of loan = _________.

Final thought: rest confidently in the knowledge that you are still doing the right thing.  The refi was (we are assuming) a smart financial move, saving you a lot of interest.  Smart financial decisions almost always trump credit score decision, unless there is something major like a house purchase coming up very soon.

[Anonymous]

PS.  You are also raise the issue of your AAoA.  If you can tell us what your AAoA is now and the total number of accounts you have, that would also help.  Do this based on what it looks like now, prior to the new loan appearing.