Paid off my mortgage, score goes down 15 points!

[dcristof]

This is a good one, can anyone explain to me why paying off a $550,000 mortgage would cause my score to go down 15 points? To be clear, I have been paying off my cards, balances are doing down. Score was in the low 700s, no BK, public records or collections.

Any ideas? I think the default is, if someting changes and they don't know why, they drop it before raising it.

[SouthJamaica]

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@dcristof wrote:

This is a good one, can anyone explain to me why paying off a $550,000 mortgage would cause my score to go down 15 points? To be clear, I have been paying off my cards, balances are doing down. Score was in the low 700s, no BK, public records or collections.

Any ideas? I think the default is, if someting changes and they don't know why, they drop it before raising it.

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That's what FICO does. It penalizes you for having no open installment loan.

It's absurd but it happens to everyone if they pay their only installment loan down to zero.

My theory is that they want to punish you for being debt-free, since banks don't make money off of debt-free people.

The excuse is that you no longer have a full "credit mix". But obviously you had a full credit mix, and you honored your obligations.

On a practical note, if you want to get your points back, there's a painless way to do it that was discovered by Revelate... take out a $500 or greater savings account at some place like Alliant Credit Union, then take out a $500 share secured loan secured by the savings account with a 48 or 60 month payout, then pay it down to 9% or $45 and disable autopay, and you'll get  your points back.

[Anonymous]

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@dcristof wrote:

This is a good one, can anyone explain to me why paying off a $550,000 mortgage would cause my score to go down 15 points? To be clear, I have been paying off my cards, balances are doing down. Score was in the low 700s, no BK, public records or collections.

Any ideas? I think the default is, if someting changes and they don't know why, they drop it before raising it.

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Welcome to the Forums, pal.

Can you let us know whether you had any other open installment loans at the time you paid it off?  SJ is assuming not, but it will help us if you can clarify.

Also, can you tell us how much you owed on that $550k mortgage at the time of payoff?  For example, did you owe $48k (say) out of 550k?  This will also give us some insight.

[Anonymous]

In general SJ is right once the credit mix changes to profile changes

It may seem counterintuitive and I'm not defending it just sharing the so called logic behind the scoring model

At a certain point there all several balls in the air
1) Credit Mix
2) A near paid off open Install account
3) possibly the only install account

All those positives go away at once the moment the installment account is retired.

The positive benefit of a low debt to original CL disappears because there is no CL anymore.

Of course the credit mix is effected because again the bounce given for managing several accounts and types of open TLs has changed...

Let alone if, it actually were the only reporting install account...it feels jacked up but the model is just adjusting to data

On one hand of course it seems punitive but on the other it could be argued the model was just taking BACK the extra style points given for juggling extra plates that aren't there anymore.

There is merit in both positions IMO

[Anonymous]

I know SJ and I have gone back and forth on this topic in the past, but I'll drop my 2 cents again since it's a new thread with a new OP. 

I don't think it's absurd or crazy that paying off the lone installment loan on one's credit report results in a credit score drop.  Yes it has to do with "credit mix" but credit mix like utilization takes a look at that moment in time.  Sure someone may have spent a decade paying off a car loan for example.  Once it's paid off, though, and no installment loan is being paid every month, the profile in question (person) has no ability to prove that they are currently able to pay a monthly installment loan.  Crazy things can happen.  I could pay off my only installment loan today and lose my job tomorrow which could result in my inability to pay an installment loan (if I had one) next month due to lack of income.  FICO isn't going to give points to the person that paid off their loan for this reason, as they aren't currently showing the ability to pay an installment loan monthly.

As already indicated above, however, there's an easy work-around to this which will get anyone back those "lost" points in a cycle or two.

[dcristof]

I have three other installment loans, and my balances on the credit I have been using has been dropping continuously.

My mortgage balance was $550 by the way. It was a big payoff. It still doesn't make sense to me.

[SouthJamaica]

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@dcristof wrote:
I have three other installment loans, and my balances on the credit I have been using has been dropping continuously.

My mortgage balance was $550 by the way. It was a big payoff. It still doesn't make sense to me.

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It doesn't make sense to me either. A consumer who has paid off his or her mortgage is a much lower risk than one who still owes money on the mortgage.

Now that you mention you have 3 open installment loans, the idea of a share secured loan is unnecessary. In terms of installment utilization, and I can explain to you exactly what happened to your scores when you paid off the mortgage.

Installment loan utilization as a scoring factor, unlike the credit card utilization scoring factor, takes into account only the aggregate percentage owed of the face amounts of the open loans. So when you paid off a mostly paid off mortgage, you lost the large face amount of $550k from the mortgage from your denominator.

E.g. If you had 3 installment loans which started out at an average of $30k each, and owed an average of $10k each on the loans, and had a $550k mortgage which had been paid down to $5000, your installment loan utilization percentage would be 35k/640k, or 5.5%.

If you pay off the mortgage, you wind up with 30k/90k, which gives you a utilization percentage of 33.33%.

That's what happened with you.

So next time around, to the extent you care about your scores, before you pay something down to zero, take into account the effect that will have on the numerator and the denominator in your utilzation percentage computation.

BTW it appears that the one universally accepted sweetspot for aggregate installment loan utilization percentage is below 10%. If you were in that range after paying off the mortgage I don't think you would have lost any points at all.

[Anonymous]

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@dcristof wrote:
I have three other installment loans, and my balances on the credit I have been using has been dropping continuously.

My mortgage balance was $550 by the way. It was a big payoff. It still doesn't make sense to me.

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Thanks!  That helps.  Here's a summary of where we are now:

Mortgage:

      Amount owed at time of payoff: 550k

      Original amount of loan: _______

Three other installment loans (all currently open):

      Total amount currently owed on all three loans:  ______

      Total original amount of the three loans:  _______

If you can tell us what those three figures are (i.e. the fill in the blank _______) we can complete the picture for you for why your score dropped and some possible ways to recover those points.

[Anonymous]

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@SouthJamaica wrote:

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It doesn't make sense to me either. A consumer who has paid off his or her mortgage is a much lower risk than one who still owes money on the mortgage.

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Unfortunately that's not enough information to really make that call.  If the person that just paid off their mortgage is now unemployed and presumably still responsible for paying the remainder of their non-mortgage bills I'd say they are more of a risk than someone that's 25 years into their 30 year mortgage with a $1200/mo payment and their income is $150k.  All I'm saying is that without more data, your above statement in and of itself can't be quantified in terms of risk.

[SouthJamaica]

All things being equal