Penalized for paying off personal loan?

[Anonymous]

One caveat to what I said earlier, there could be a point change due to the effect on AAOA.

[Anonymous]

Where would the change to AAoA come from? 

[Anonymous]

Adding a loan.

[Anonymous]

I must have missed where adding a loan was discussed.  I simply thought we were talking about closing a loan, which of course doesn't impact AAoA.

[Anonymous]

BBS, my first comment in post number nine I spoke of opening a loan. Opening or closing it is not gonna change any points IF you already have an open loan on your record (assuming no balance changes over threshold) and so I added the caveat because opening a loan can affect AAOA.

[randomguy1]

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@Anonymous wrote:

I always see this as a glass half full vs glass half empty argument.  One may argue that someone takes a "hit" for paying off their only open installment loan, where an equally valid argument is that they got a "boost" from having it there.  If it wasn't there in the first place, there wouldn't have been a hit (as there would never have been a boost).

Closing the only open installment loan on a file does not impact credit mix, as credit mix is still satisfied with either an open or closed installment loan.  What closing it does impact however is the Amounts Owed sector of the Fico pie, where previously points were being awarded for installment loan utilization being present and low.

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Help me understand this. Are you saying if I have a relatively new installment loan that is owed 80-90% of the original loan amount and I pay it off, my credit score will not take it a hit as the installment loan utilization is present and high?

[Anonymous]

Randomguy1 it all depends. The following is based on FICO 8:

If you’ve never had a loan and you get one, you get points for credit mix. You keep those points long as you have a loan on your credit report open or closed.

The other way you get awards/penalties from a loan is when you cross installment utilization thresholds. It’s not known exactly where all these are. But the big one is it 8.9%.

So, if you already have an open loan on your CR, then getting another loan is going to affect your score depending on how it affects your aggregate installment utilization and how it affects your AAoA.

Now if all you have is a closed loan on your CR, and you open a new loan and it does not cause you to cross any AAOA thresholds, then you should not suffer any penalty. If you were to immediately pay it off, you would realize no gain.

If on the other hand, you pay it down below a threshold, you will gain points, especially if you go below the 8.9% threshold. It’s also believed if you simply make payments on it for so many months you will also realize some points.

This is my understanding.

[Anonymous]

Good reply from BM above.