Score Drops When Paying Things Off (I don't understand)

[Anonymous]

Good Morning and Merry Christmas, 

I have a question that many of you may already have the answer to.  Can someone please let me know why credit scores drop when paying off accounts.  I paid a couple of loans off (purchasing a home) to decrease my DTI.  It was one of the things my loan officer recommended that I do prior to closing.  It seems as if the more I pay off; the more my score drops.  I have next to zero utilization on my credit cards; everything is paid on time.  When the accounts go to paid/closed status; my score drops.  These drops are not signifigant drops; but they are signifigant enough for me.  No more than 8 points; but I don't need any more drops.  It drops Vantage appr. 8 points; and myfico, 4 points.  Any response would be great bc this seems backwards.  

[SouthJamaica]

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@Anonymous wrote:

Good Morning and Merry Christmas, 

I have a question that many of you may already have the answer to.  Can someone please let me know why credit scores drop when paying off accounts.  I paid a couple of loans off (purchasing a home) to decrease my DTI.  It was one of the things my loan officer recommended that I do prior to closing.  It seems as if the more I pay off; the more my score drops.  I have next to zero utilization on my credit cards; everything is paid on time.  When the accounts go to paid/closed status; my score drops.  These drops are not signifigant drops; but they are signifigant enough for me.  No more than 8 points; but I don't need any more drops.  It drops Vantage appr. 8 points; and myfico, 4 points.  Any response would be great bc this seems backwards.  

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Your general statement that "credit scores drop when paying off accounts" is simply not accurate.

1. Vantage scores are irrelevant.

2. A 4 point drop in one's FICO scores is not substantial.

3. Aggregate open loan utilization affects one's FICO 8 scores, but has little effect on one's FICO mortgage scores.  If the aggregate is 9% or less that gives your scores a boost. If you have zero open loans you get a penalty.

4. Having zero utilization across all revolving accounts earns a penalty. This can be avoided by having one bank card reporting a balance.

[Phana24]

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@Anonymous wrote:

Good Morning and Merry Christmas, 

I have a question that many of you may already have the answer to.  Can someone please let me know why credit scores drop when paying off accounts.  I paid a couple of loans off (purchasing a home) to decrease my DTI.  It was one of the things my loan officer recommended that I do prior to closing.  It seems as if the more I pay off; the more my score drops.  I have next to zero utilization on my credit cards; everything is paid on time.  When the accounts go to paid/closed status; my score drops.  These drops are not signifigant drops; but they are signifigant enough for me.  No more than 8 points; but I don't need any more drops.  It drops Vantage appr. 8 points; and myfico, 4 points.  Any response would be great bc this seems backwards.  

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I think it's important for you to understand how your credit score is derived.  It is NOT based on logic and your actual financial position.  It is simply a reflection of where you stand with respect to your credit statistically compared to the entire population of consumer creditors, and what that position has indicated in the past for the population as a whole.  While it may be logical(and probably true in most instances) that an individual who has successfully paid off a mortgage is in a better position to handle debt, FICO has acquired statistics at a high level of confidence that indicate those who have some remaining mortgage debt are less likely to have a problem in the future.  You might want to read the thread with the FICO reps.  Several people brought up similar examples where "conventional wisdom" would suggest that financial changes such as paying off debt early, eliminating debt, dropping older credit cards for newer cards that offered lower rates/better rewards/lower APR should "logically" increase your credit score, yet their score declined.  The response that is given, albeit often worded differently, is that the algorithm(method to calculate the score) could care less about your actual position and ability to pay.  All that matters is where you stand compared to everyone else, and what those numbers predict for EVERYONE.  

South Jamaica explained why your particular score suffered.  If you want to maximize your score short-term, follow that advice and then read the various threads on scoring.  We know some of the suggestions are counterintuitive and often silly, but it's what much more knowledgeable people than I have figured out in the group between trial-and-error and information released by the CRAs.  

[Anonymous]

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@Anonymous wrote:

Good Morning and Merry Christmas, 

I have a question that many of you may already have the answer to.  Can someone please let me know why credit scores drop when paying off accounts.  I paid a couple of loans off (purchasing a home) to decrease my DTI.  It was one of the things my loan officer recommended that I do prior to closing.  It seems as if the more I pay off; the more my score drops.  I have next to zero utilization on my credit cards; everything is paid on time.  When the accounts go to paid/closed status; my score drops.  These drops are not signifigant drops; but they are signifigant enough for me.  No more than 8 points; but I don't need any more drops.  It drops Vantage appr. 8 points; and myfico, 4 points.  Any response would be great bc this seems backwards.  

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Which accounts are "paid/closed"? The installment loans or your CCs too? Do you have any installment loans left open now that you paid a couple off?

[Anonymous]

@Anonymous They were installment loans that were paid off. I have a couple with my bank that I'm paying off monthly. 

[Anonymous]

Your aggregate loan utilization probably went up and that’s probably why you lost a couple points.