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Why paying off your loan is bad for your credit

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Anonymous
Not applicable

Re: Why paying off your loan is bad for your credit

I recently made it into the 700 club after a 14 month rebuild that started in the low 500's. My highest score was TU at 762. I was seeing increases with each new CC opened. Last month I refinanced my house and used some of the cash to pay off a Springleaf loan of $8K that I had paid perfectly for 13 months. Last week my score dropped 10 points when this reported closed. This week, the mortgage finally reported pid/closed and I lost another 24 points!

 

I imagine the new mortgage with Chase will show up in the next week or two, along with a new $4K installment loan from NFCU (Heat Pump died) and my new Chase Freedom card. I expect another rapid nose dive in points since these new accounts are going to kill my AAoA big time. All of this said, I have to get used to living back in the 600's for the next year or more I guess. I agree with the folks who think It seems counter intuitive that paying off debt has a negative effect on scores.

Message 21 of 49
bdhu2001
Valued Contributor

Re: Why paying off your loan is bad for your credit


@Anonymous wrote:

I recently made it into the 700 club after a 14 month rebuild that started in the low 500's. My highest score was TU at 762. I was seeing increases with each new CC opened. Last month I refinanced my house and used some of the cash to pay off a Springleaf loan of $8K that I had paid perfectly for 13 months. Last week my score dropped 10 points when this reported closed. This week, the mortgage finally reported pid/closed and I lost another 24 points!

 

I imagine the new mortgage with Chase will show up in the next week or two, along with a new $4K installment loan from NFCU (Heat Pump died) and my new Chase Freedom card. I expect another rapid nose dive in points since these new accounts are going to kill my AAoA big time. All of this said, I have to get used to living back in the 600's for the next year or more I guess. I agree with the folks who think It seems counter intuitive that paying off debt has a negative effect on scores.


Remember that part of the dive is also that when you refinanced. Your mortgage is now at 100% owe instead of 60% or etc.  Even though installment loans don't count the same as credit cards, they do still count and the amount you owe vs amount the loan started at counts. As you pay down your loan, your FICO will swing up.  Of course your age of credit and other factors will also help. I believe when it's paid down 20% or more it really helps, but your FICO score starts moving before you get there.

Original Mortgage maturity Sept 2044; Refi maturity Dec 2030
Starting Score: EX 751 EQ 720 TU 737 on 4/9/14
Current Score: EX 849 EQ 835 TU 843
Goal Score: 850


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Message 22 of 49
vanillabean
Valued Contributor

Re: Why paying off your loan is bad for your credit


@bdhu2001 wrote:

Remember that part of the dive is also that when you refinanced. Your mortgage is now at 100% owe instead of 60% or etc.  Even though installment loans don't count the same as credit cards, they do still count and the amount you owe vs amount the loan started at counts. As you pay down your loan, your FICO will swing up.  Of course your age of credit and other factors will also help. I believe when it's paid down 20% or more it really helps, but your FICO score starts moving before you get there.

 

This likely carries far less weight with mortgages than other installment loans.

 

Message 23 of 49
Roarmeister
Frequent Contributor

Re: Why paying off your loan is bad for your credit

You left off a very important word in your title - "Why paying off your load is bad for your credit SCORE."

 

It is not bad for your credit.  You now have money available to pay off other debts or to save.  All those things in turn pay you dividends in you financial future.

So what if your score drops a few points by paying off a debt?  Are you defined by your score?  Are you worse off financially?  Emphatically - NO.

 

Moving on, next topic -- nothing more to discuss.

Starting Score: EQ 732 October 2007; Current Score: EQ 839; TU 865, July 2022;
Oldest Reporting EQ Account: 20.4 years; EQ AAoA: 9.9 years;
ACTUAL Oldest account 40.1 years; ACTUAL AAoA 19.3 years.





Message 24 of 49
slund5499
Established Contributor

Re: Why paying off your loan is bad for your credit

Like you I took out a personal installment loan with One Main. The account reported in Nov 2014 and my score went up 17 points.....making up for the 21 point drop I incurred due to app spree and inquiries. I believe the score will continue to go up as the life of the loan diminishes. Mine is a 12 month loan and I would expect to see scoring increases after is surpasses the 50% paydown timeframe.

In the garden since 02/1/23. Newest Account AU Discover It 10K
02/23 Scores; EQ 608 TU 642 EX 575 CCU: 20%, Inq. 2, 1, 2 Collections $39K
Lending Club: newest account 2/3/23. Old Fico 1/17 EQ 530 TU 542 EX 512

Message 25 of 49
HiLine
Blogger

Re: Why paying off your loan is bad for your credit


@Roarmeister wrote:

You left off a very important word in your title - "Why paying off your load is bad for your credit SCORE."

 

It is not bad for your credit.  You now have money available to pay off other debts or to save.  All those things in turn pay you dividends in you financial future.

So what if your score drops a few points by paying off a debt?  Are you defined by your score?  Are you worse off financially?  Emphatically - NO.

 


It is bad for your credit. Credit is a wholly different world from financial well-being. 

Message 26 of 49
HiLine
Blogger

Re: Why paying off your loan is bad for your credit


@mitchblue wrote:

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..


Again, you are not penalized. Compared to not having an installment loan record at all on your credit profile, you have a higher FICO score. 

Message 27 of 49
slund5499
Established Contributor

Re: Why paying off your loan is bad for your credit

I diasgree with your assessment. Everyone has a different credit profile and it is the contents of that profile that dictate your FICO scores. In my case, the installment loan was worth the investment and only helps my FICo score, which is modeled after my credit profie.

A person may not be penalized in the financial community or credit markets for not having an installment loan (active or not) but having an active installment TL has a positive impact under the FICO scoring algorithyms used by lenders today.

I suspect that my FICo will only improve as the installment TL matures and will have a a slight negative impact once it reaches maturity and is reported as closed and paid. As the loan matures from 100% to 80% to 60% to 40% to 20% the TL provides positve points to my FICO scores. To counter the negative impact when it is paid off and closed, one only need to renew or acquire another installment TL prior to the maturity of the first loan.

In the garden since 02/1/23. Newest Account AU Discover It 10K
02/23 Scores; EQ 608 TU 642 EX 575 CCU: 20%, Inq. 2, 1, 2 Collections $39K
Lending Club: newest account 2/3/23. Old Fico 1/17 EQ 530 TU 542 EX 512

Message 28 of 49
slund5499
Established Contributor

Re: Why paying off your loan is bad for your credit

You are penalized for not having an installment line of credit for at least the following:

 

1. An installment TL has a positive impact on FICO scores,

2. Lenders will decline for not having the traditional mix of TL between revolving (Sore and bankcard) and installment history

3. Those lenders who do recon for not having an installment TL will do so under a high risk scenerio.

4. Having both active and inactive installment TL does increase your FICo scores

In the garden since 02/1/23. Newest Account AU Discover It 10K
02/23 Scores; EQ 608 TU 642 EX 575 CCU: 20%, Inq. 2, 1, 2 Collections $39K
Lending Club: newest account 2/3/23. Old Fico 1/17 EQ 530 TU 542 EX 512

Message 29 of 49
Anonymous
Not applicable

Re: Why paying off your loan is bad for your credit

While your credit Score may take a hit your credit may or may not. Simply not having a payment may decrease DTI to the point where you could take on more debt. A nominal decrease in score may or may not move you into a different rate bucket. Either the higher score or the increase in cash flow could help or the opposite could hurt. For automatic decisions the score itself may be more important. On something that is being manually reviewed the lack of a debt may be more valuable. Especially in light of the fact that they can see you just paid said loan off. 

Message 30 of 49
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