Paying off loan lowers score?

[Anonymous]

Hello Everyone,

I paid off a loan I got a few months ago.  My credit score dropped 6 points today because of it.  How is that possible?

Company -------  CORPORATION

• Balance
• $1,300$0$0

• Past due
• Not Reported

• Status
• Pays account as agreed

• Last activity
• 09/01/201510/01/201510/01/2015

• Description
• Unsecured Fixed rateClosed or paid account / zero balance Unsecured Fixed rateClosed or paid account / zero balance Unsecured Fixed rate

[CH-7-Mission-Accomplished]

Always happens.  Be grateful scores didn't drop 20 points.

[takeshi74]

You have to keep in mind that not all credit is assessed the same.  Installments are generally seen as less risky as revolvers do you lose the scoring benefit of having an installment in your mix when you pay it off.  As stated above, this is typical.  Don't overlook prior discussions as a resource.  This is a fairly common topic.

https://www.google.com/search?q=paying+off+loan+score+drop+site%3Aficoforums.myfico.com&oq=paying+of...

6 points really isn't worth fretting over IMO.  If you're going to worry over score changes then set a threshold of at least 20 points.  Your scores will fluctuate a bit just from normal activity.

[Thomas_Thumb]

---

@takeshi74 wrote:

You have to keep in mind that not all credit is assessed the same.  Installments are generally seen as less risky as revolvers do you lose the scoring benefit of having an installment in your mix when you pay it off.  As stated above, this is typical.  Don't overlook prior discussions as a resource.  This is a fairly common topic.

https://www.google.com/search?q=paying+off+loan+score+drop+site%3Aficoforums.myfico.com&oq=paying+of...

6 points really isn't worth fretting over IMO.  If you're going to worry over score changes then set a threshold of at least 20 points.  Your scores will fluctuate a bit just from normal activity.

---

Agree -worrying about changes of 10 points or less (unless there is a trend) is like chasing a ghost.

Personally, if the change is more than 10, I would consider the shift significant.

[Anonymous]

Same thing just happened to me. I paid of a large installemnt debt. I'm getting myself ready to buy a house in NorCal and it's rediculously expensive (~$800/sqft) and I need to be almost debt free for my debt to income ratios to qualify for a mortgage. Another thing is that it seems, at least in my case, that each Credit Bereau scores it differently. Experian dinged me 12 points, TransUnion 3, and Equifax 0, all for the same installment debt payoff.

[Thomas_Thumb]

HS - Contact the Property Brothers and get a fixer upper for $350/SQFT

[Anonymous]

Haha... I wish... you can't buy a old garden shed for $350/sqft in the Bay Area of Nothern California.

[NRB525]

OP, do you have another installment loan that is still open, you are still making payments?

As noted by others, usually when someone brings up a paid installment loan, the points drop is much more significant.

The Installment loan is recommended as another Mix component, in addition to revolving credit cards, as basic components of building the score calculations.

[Thomas_Thumb]

NRB525, I suspect you are right. It certainly appears the OP has another open loan thus, the muted effect.  

If so, paying off the one loan causes an increase in (aggregate balances)/(aggregate of original loans). The original loan amount of the paid off loan no longer factors into the denominator.

P.S.

1) Mix looks at both open and closed installment loans - either works for mix. That's why I discount mix as the root cause in a score change when a loan closes.

2) The amounts owed category looks for open installment loans. If all loans are paid off and closed, that scoring element no longer exists and this, I suspect, is the reason for closed [no remaining open] loan score drops.

3) It is possible to reach 850 without any open loans - so it must be possible to make up for the "missing loan element" in other ways.

[CreditMagic7]

---

@Thomas_Thumb wrote:

NRB525, I suspect you are right. It certainly appears the OP has another open loan thus, the muted effect.  

If so, paying off the one loan causes an increase in (aggregate balances)/(aggregate of original loans). The original loan amount of the paid off loan no longer factors into the denominator.

P.S.

1) Mix looks at both open and closed installment loans - either works for mix. That's why I discount mix as the root cause in a score change when a loan closes.

2) The amounts owed category looks for open installment loans. If all loans are paid off and closed, that scoring element no longer exists and this, I suspect, is the reason for closed [no remaining open] loan score drops.

3) It is possible to reach 850 without any open loans - so it must be possible to make up for the "missing loan element" in other ways.

---

Indeed only a 6 point decrease might be considered relatively mild compared to some of the extremes that will almost always quickly draw members over into this subforum in a flash. And especially after the shock of a massive drop (per installment payoff) on the order of 10+ and well beyond in some instances.