Score dropped 30 points

[Anonymous]

---

@Anonymous wrote:

If you consider that banks etc. make their money only when you are paying interest on debt then of course they're pissed you're done.

It's people paying interest -- on cc balances, loans, etc. -- that provide the banks' income. The 1% are provided for by the 99%.

I have an auto and a personal loan finishing up in the next few months.  My guess is i'll take a hit on my scores.

---

---

Yes you will but there's a mathematical reason for it. I think we all understand the basic premise that the more one owes, the riskier we likely are to a lender. Let's assume you have three loans now, a mortgage, the auto loan, and the personal loan. Auto and personal loan are currently low LTV (meaning you owe very little compared to what you borrowed). Your mortgage is high LTV. When you add the outstanding balances and compare to the total amount borrowed for the three loans, you get a percentage owed.

Now you pay off the personal loan and auto loan, and you're left with only the LTV of the mortgage. That is higher now because the mitigating effect of the low-balance loans is gone. Higher LTV means you'll likely lose a few points.

The scoring algorithm isn't perfect, but it isn't a scam. And you have to remember, it isn't designed for us as consumers. It's designed with the best interests of lenders in mind. The fact that we can learn and understand how it works allows us to position ourselves and strategize in ways that help us. I'm not an apologist for lenders but I am realistic about the implications of scoring and its effects on us.

[Anonymous]

---

@Anonymous wrote:

If you consider that banks etc. make their money only when you are paying interest on debt then of course they're pissed you're done.

---

---

I wouldn't say that.  Any loan has a term, an interest rate attached to it and the money the bank makes is determined out of the gate.  If you pay it according to the terms you are meeting expectations as the customer and the bank is getting exactly what they want/planned to get.  When you're done they are happy they made what was planned.  They're pissed if you default, as they don't make what was planned or worse yet, take a loss.

[Anonymous]

I again express my view that the AZ loss is not a penalty, rather you’re being rewarded when you do use your cards. Likewise when you pay off a loan you owe less, have less monthly obligations, and are more likely to be able to obtain more credit, thereby making you riskier, imho.

[Anonymous]

I guess the AZ penalty or non-AZ reward can be viewed as a glass half full / glass half empty argument.

I don't follow you regarding the reasoning behind the paying off of a loan though.  Being able or capable to obtain more credit doesn't make one more risky IMO.  For example, if someone goes from a 640 score to a 720 score over night because their final baddie comes off their report, they are now less risky of course... but they now are also able/capable of obtaining more credit, which shouldn't at the same time make them more of a risk.

The argument I always make regarding the installment loan payoff is that with an open loan one has the ability to prove in that moment of time that they're able to make monthly payments on that loan.  One the loan is gone, there is no way to prove their ability to make loan payments at the new point in time.  One could lose their job/income the day they pay off their loan and if they were to obtain a new loan be completely unable to make a payment, for example.

[Anonymous]

---

@Anonymous wrote:

I guess the AZ penalty or non-AZ reward can be viewed as a glass half full / glass half empty argument.

I don't follow you regarding the reasoning behind the paying off of a loan though.  Being able or capable to obtain more credit doesn't make one more risky IMO.  For example, if someone goes from a 640 score to a 720 score over night because their final baddie comes off their report, they are now less risky of course... but they now are also able/capable of obtaining more credit, which shouldn't at the same time make them more of a risk.

The argument I always make regarding the installment loan payoff is that with an open loan one has the ability to prove in that moment of time that they're able to make monthly payments on that loan.  One the loan is gone, there is no way to prove their ability to make loan payments at the new point in time.  One could lose their job/income the day they pay off their loan and if they were to obtain a new loan be completely unable to make a payment, for example.

---

@Anonymous I don't find baddies falling off analogous to paying off a loan. If ones credit file goes clean, they become less of a risk and therefore open to more credit.

When one pays off a loan, their monthly obligation decreases which makes them more likely to receive a greater amount of credit than they otherwise would potentially, but I do agree with your position as well regarding being able to demonstrate reliability in making monthly payments.

[Anonymous]

---

@Anonymous wrote:

---

---

@Anonymous I don't find baddies falling off analogous to paying off a loan. If ones credit file goes clean, they become less of a risk and therefore open to more credit.

---

Alright, use your own example then, except someone with multiple loans.  They've got 10 loans, pay off 1, then another, then yet another etc.  Going off of your original point, each time they pay one off they're then becoming more of a risk so wouldn't it then make sense for their score to drop all 10 times with each loan payoff?  If your point applies to paying off 1 loan, certainly it would apply to more than 1 loan since each time results in less debt obligation meaning they can then take on more debt.  Do you believe this person becomes more of a risk each time they pay off a loan?

[Anonymous]

---

@Anonymous wrote:

---

@Anonymous wrote:

---

---

@Anonymous I don't find baddies falling off analogous to paying off a loan. If ones credit file goes clean, they become less of a risk and therefore open to more credit.

---

Alright, use your own example then, except someone with multiple loans.  They've got 10 loans, pay off 1, then another, then yet another etc.  Going off of your original point, each time they pay one off they're then becoming more of a risk so wouldn't it then make sense for their score to drop all 10 times with each loan payoff?  If your point applies to paying off 1 loan, certainly it would apply to more than 1 loan since each time results in less debt obligation meaning they can then take on more debt.  Do you believe this person becomes more of a risk each time they pay off a loan?

---

@Anonymous No I don't believe they become more of a risk each time they pay off a loan. I find that someone with zero loans has a greater likelihood to obtain a larger loan then someone with one or more loans and could be considered therefore a higher risk. Someone with multiple loans doesn't run that risk, as they already have multiple obligations. 

[Anonymous]

---

@Anonymous wrote:

---

---

@Anonymous No I don't believe they become more of a risk each time they pay off a loan. I find that someone with zero loans has a greater likelihood to obtain a larger loan then someone with one or more loans and could be considered therefore a higher risk. Someone with multiple loans doesn't run that risk, as they already have multiple obligations. 

---

I guess I find your statement above confusing when reading it following what you originally said, which was, "Likewise when you pay off a loan you owe less, have less monthly obligations, and are more likely to be able to obtain more credit, thereby making you riskier, imho."

In reading your quote above, paying off one (of multiple) loans would fit your description, but then you say only if they're paying off their only loan.  I don't really understand that if I'm being honest, as less [loan] debt is less loan debt.  I don't see how in one case it means more risk, but in another it means no more risk.

[Anonymous]

If you have multiple loans you are less likely to obtain as large of a loan aa if you had none. I probably should’ve spoken a little more carefully in my initial post. But my point is if you do not have any loan obligations, you’re more likely to get a larger loan than if you do have loan obligations.

Monthly obligations would be lower DTI would therefore be lower and outstanding obligations would be lower, therefore making One without a loan more likely to get a larger amount than one with several loans. Jmho.

[Anonymous]

If I’m a lender and you’ve got $200,000 in loans and you’re otherwise similarly situated to someone who has no open loans, I think the better risk is the person without any currently open loans.