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So you pay your car loan in full ...

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So you pay your car loan in full ...

and Experian takes 21pts? So paying your car loans and or other loans off is not a good thing to Experian.

Message 1 of 23
22 REPLIES 22
Valued Contributor

Re: So you pay your car loan in full ...

Because credit mix accounts for a decent percentage of your score, depending on if you have any other installment loans that are open on your report, yes you could lose points for that. In fact, not only with Experian, but all 3 bureaus. The model is set up to want to see how you are currently performing on open loans. If you do not have another one open, or maybe you do but it is fairly new, that is why you see the score drop. You gain the most points in that category when you have the open installment with most of it paid.

Don't let that deter you though. Paying off debt is a good thing for sure. There are other possible methods you can use that are widely spoken about on here to get some of those points back but I will not go into all of that as not to confuse you.

                               

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Message 2 of 23
New Visitor

Re: So you pay your car loan in full ...

Is it like on the basis of the score our loans will get decided.

Or we can not apply for the car loan.

Message 3 of 23
Super Contributor

Re: So you pay your car loan in full ...


@GeraldBass wrote:

Is it like on the basis of the score our loans will get decided.

Or we can not apply for the car loan.


I'm not really understanding your question here.  FICO scores are considered and can impact loan approval and/or the rate at which it's approved. 

Message 4 of 23
Frequent Contributor

Re: So you pay your car loan in full ...

If it was your only open loan you closed a line of credit & you have a less diverse profile. Common term I like to use is that you cannot improve credit by closing lines of credit.

Message 5 of 23
Senior Contributor

Re: So you pay your car loan in full ...


@Physh1 wrote:

If it was your only open loan you closed a line of credit & you have a less diverse profile. Common term I like to use is that you cannot improve credit by closing lines of credit.


Yes, but credit mix accounts for only 10% of your score. OP didn't say what their score is, but a 22 point drop is a pretty big hit.

 

I think installment loans are one of the biggest screw ups in Fico scoring. No installment loan, hit to your score for lack of credit mix. Take out an installment loan and a bigger hit to your score for the inquiry, new account, and loan balance 100% of loan amount. And not getting the best boost to your score until you loan balance is less than 9% of loan amount??? By definition you would have less than 1 year of payments left, and with the average car loan of 5 years you get a hit to your score for over 80% of the loan term (4 out of 5 years) even while making payments perfectly on time???

Just ticked that as I took a car loan out in Oct. 2017 and now over 1 year of perfect payment history my loan balance is just under 81% of loan amount and I still see the "loan balances too high!" in the negative comments on my Fico scores. Smiley Frustrated


Fico 08: 734/716/734 TU/EX/EQ
Message 6 of 23
Valued Contributor

Re: So you pay your car loan in full ...


@DaveInAZ wrote:

@Physh1 wrote:

If it was your only open loan you closed a line of credit & you have a less diverse profile. Common term I like to use is that you cannot improve credit by closing lines of credit.


Yes, but credit mix accounts for only 10% of your score. OP didn't say what their score is, but a 22 point drop is a pretty big hit.

 

I think installment loans are one of the biggest screw ups in Fico scoring. No installment loan, hit to your score for lack of credit mix. Take out an installment loan and a bigger hit to your score for the inquiry, new account, and loan balance 100% of loan amount. And not getting the best boost to your score until you loan balance is less than 9% of loan amount??? By definition you would have less than 1 year of payments left, and with the average car loan of 5 years you get a hit to your score for over 80% of the loan term (4 out of 5 years) even while making payments perfectly on time???

Just ticked that as I took a car loan out in Oct. 2017 and now over 1 year of perfect payment history my loan balance is just under 81% of loan amount and I still see the "loan balances too high!" in the negative comments on my Fico scores. Smiley Frustrated


 

I have that same issue. I withheld my down pmt & made it as a balloon first payment to bring the balance down.

It still lists as too high at just over 50%.

In my opinion this loan thing is an unfair scoring algorithm. You make excellent payments but for the first year or two, maybe longer, it's still a neg effect on credit score. 

Couple that with your info on the new inquiry etc and it seems stacked against the consumer on both sides. 10_3_6.gifPickles.gif

 

Happy Thanksgiving Everyone.. Thanksgivingfave.gif

CHEERS




Message 7 of 23
Super Contributor

Re: So you pay your car loan in full ...


@DaveInAZ wrote:

@Physh1 wrote:

If it was your only open loan you closed a line of credit & you have a less diverse profile. Common term I like to use is that you cannot improve credit by closing lines of credit.


Yes, but credit mix accounts for only 10% of your score. OP didn't say what their score is, but a 22 point drop is a pretty big hit.


A common meme here on the forums is to attribute the FICO 8 score drop sometimes associated with paying off a loan to the person allegedly having a hit to the Credit Mix portion of his score.

 

This is actually untrue.  He had a mix of credit both before the payoff and after (the closed loan has not been deleted from his report).

 

The factor affected is not from the smaller Credit Mix category (10%) but rather from the much larger Amounts Owed category (30%).  FICO 8 looks at the amount you currently owe on your open loans compared with the amount they were originally for.  The phrase we often use for that here is Installment Utilization.  What is most often happening is that the person was getting a 30-35 point boost for having a positive but very low installment utilization.  After the payoff he no longer has this and so loses that scoring bonus.  (FICO 8 also gives you a big boost for having a positive but very low CC utilization.)

Message 8 of 23
Moderator Emeritus

Re: So you pay your car loan in full ...


@successmatters wrote:

and Experian takes 21pts? So paying your car loans and or other loans off is not a good thing to Experian.


Paid mine off and took a 20+ point reduction! Say what, yeah I know ... have to have an installment loan to keep FICO happy!

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Message 9 of 23
Highlighted
Senior Contributor

Re: So you pay your car loan in full ...


@CreditGuyInDixie wrote:

@DaveInAZ wrote:

@Physh1 wrote:

If it was your only open loan you closed a line of credit & you have a less diverse profile. Common term I like to use is that you cannot improve credit by closing lines of credit.


Yes, but credit mix accounts for only 10% of your score. OP didn't say what their score is, but a 22 point drop is a pretty big hit.


A common meme here on the forums is to attribute the FICO 8 score drop sometimes associated with paying off a loan to the person allegedly having a hit to the Credit Mix portion of his score.

 

This is actually untrue.  He had a mix of credit both before the payoff and after (the closed loan has not been deleted from his report).

 

The factor affected is not from the smaller Credit Mix category (10%) but rather from the much larger Amounts Owed category (30%).  FICO 8 looks at the amount you currently owe on your open loans compared with the amount they were originally for.  The phrase we often use for that here is Installment Utilization.  What is most often happening is that the person was getting a 30-35 point boost for having a positive but very low installment utilization.  After the payoff he no longer has this and so loses that scoring bonus.  (FICO 8 also gives you a big boost for having a positive but very low CC utilization.)


Ah, thanks for clarifying that. But I still think it's a fault in the Fico algorithms. High CC utilization is very often a sign of at least a potential problem in the person's ability to repay, maxing out a CC is a sign that the borrower may not have control over their spending vs. income. And the CC utilization is much more lenient: 0-9% Excellent, 10-29% Good, 30-49% Fair, 50-74% Poor, 75%+ Very Poor. The same criteria should not be used for installment loans. An installment loan at 76% should not be considered Very Poor as it means they have made almost 1/4th of their loan payments.

And add in CC debt is very high APR%, so you have motivation to pay that down. Car loans are some of the lowest APR% debt (for Good to Excellent credit), so little motivation to pay that down. My credit was good enough for a 65 month car loan at 2.99% (in 10/2017), while Barclays still thinks I should pay them 22.9% if I were foolish enough to carry a balance.

 


Fico 08: 734/716/734 TU/EX/EQ
Message 10 of 23
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