Why paying off your loan is bad for your credit

[HiLine]

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@Stylez wrote:

It makes no sense. If a lender sees that you took out a loan and paid it off, why would they be under the impression that they are in the dark about your ability to make monthly payments towards your installment loan? Installment loans stay on your report for like 7-10 years even after they've been paid off. So unless you paid off your loan and didn't take another one for 7-10 years it makes no sense that paying off a loan can hurt your credit.

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Because the loan that was paid off was a thing of the past. Habits change. They need to know how you have been managing credit now and before, not just how you did it years ago.

Your closed installment loan will still give you an edge over not having any installment loan records at all, but it will never be as helpful as an open loan.

[Stylez]

A late payment is a thing of the past too. However, unless it's years in the past, it still hurts you. There's no logic behind paying off your loan hurting your score. I'm not going to say this doesn't happen, I'm just saying that it's illogical. If you borrow money, you're supposed to pay it off and make your payments on time. Penalizing someone for doing what they are supposed to do is silly. I simply can't comprehend how someone could see that you took out a loan and paid it off like you where supposed to and then count that as a negative.

[HiLine]

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@Stylez wrote:

A late payment is a thing of the past too. However, unless it's years in the past, it still hurts you. There's no logic behind paying off your loan hurting your score. I'm not going to say this doesn't happen, I'm just saying that it's illogical. If you borrow money, you're supposed to pay it off and make your payments on time. Penalizing someone for doing what they are supposed to do is silly. I simply can't comprehend how someone could see that you took out a loan and paid it off like you where supposed to and then count that as a negative.

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The further in the past a late payment is, the less of an impact it has. Exact same deal with installment loans. If you are currently late on payments, it hurts you big time. If you are currently making loan payments on time, it helps you big time. The analogy you proposed is perfect.

There is a bit of a contradiction in your argument. For the same loan, you cannot make periodic payments and pay it off at the same time. If you have paid off a loan, you can no longer make payments on it. As the saying goes, you can't have a cupcake and eat it too. When you close an installment loan, you don't get penalized for anything. You simply get cut back on the rewards you used to have by making periodic payments.

Credit reflects your debt management habits from both the past and the present. Naturally, the more recent experience will carry more weight. If you are making payments on time now, it's a safer bet that you will keep making payments on time than if you did so 5 years ago.

And again, there is no "penalty" here. Loan payers were given something before, and now that something is taken away, so they should end up at the some spot. If people didn't complain about a score increase when they used to make installment loan payments, it just doesn't make sense if they complain when the score increase is taken away when they are no longer making these payments.

[Stylez]

This whole thread is about how paying off your loan is bad for your credit. My argument is that this makes no sense. Nowhere did I contradict myself. Again, when you take out a loan your are exepcted to make your payments on time and eventually pay the loan off. If you pay off the loan and there are no late payments, then you've done what you were exepcted to do. There is no logic behind penalizing someone in this instance. Even if you pay off a loan early, it stays on your report for 10 years. There is no contradiction in my argument and there is no logic behind dropping someone's score for simply paying off a loan.

[upnorth]

The falllacy in the argument that one needs to have a mix of loan types is the premise that there is a difference in paying a monthly installment of different thpes of loans. In reality whether one pays off a credit card debt each month or a car loan, each act shows a responsible act. In my opinion whether it is two credit card payments or one credit card and one instalment loan is of no consequence. The scoring system is a subtle way to encourage consumers to be dependent on banks. Would i personally lend my moeny to some one in debt to their eye balls or some with a no debt on their car and house, but only uses a credit card for the cash back and convenience? Clearly the latter. This is why when the recession hit, hig credit score consumers who had a "mix of loan thpes" fell like bowling pins and defaulted. FICO scores failed banks because if acore were high then default of risk should be negligible. In my case my TU FICO score is only 805 and will remain there. My house is paid off, i buy new cars on cash and use credit cards for cash back and pay it off each month in full. But in the convulted credit rating system we have, i will continue to be penalised for not having a loan that will profit banks. I refuse to play that game. 

[HiLine]

Bump

[Anonymous]

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@HiLine wrote:

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@Stylez wrote:

It makes no sense. If a lender sees that you took out a loan and paid it off, why would they be under the impression that they are in the dark about your ability to make monthly payments towards your installment loan? Installment loans stay on your report for like 7-10 years even after they've been paid off. So unless you paid off your loan and didn't take another one for 7-10 years it makes no sense that paying off a loan can hurt your credit.

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Because the loan that was paid off was a thing of the past. Habits change. They need to know how you have been managing credit now and before, not just how you did it years ago.

Your closed installment loan will still give you an edge over not having any installment loan records at all, but it will never be as helpful as an open loan.

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Funny how this only happens to our positive credit history. If it were a defaulted loan you wouldn't hear about it being a thing of the past or hear that this persons habits may have changed. Even if you start showing good payment habits the bad will haunt you. I believe if you paid off a loan and haven't defaulted or been late paying anything else since there is no reason to assume you can't still properly make payments. 

[HiLine]

I think you read my post wrong. I thought I had said it clearly that a closed installment loan still has a positive effect on your FICO score.

[mitchblue]

Eventually you have to pay off the loans, don't ya. Eventually the time comes when the last payment is paid. If I had a car loan and it was paid off 2 years ago but I still drive it I shoudn't be penalized. I'm certainly not going to buy a new car just to appease the CA God's. I know how it works but makes no sense..

[vanillabean]

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@HiLine wrote:

As the saying goes, you can't have a cupcake and eat it too.

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I did not know that, lol.

But if you have a mortgage and pay off your car loan, there's no penalty because there's still an open installment loan?

A couple of mathematicians observe a bar across the street. Two walk in, and later three leave. If one more enters, one of the mathematicians says, the bar will be empty.