I don't understand it. I know the world of credit scoring is confusing and hard to understand but this is crazy. I paid off my car loan last month and once they reported they payoff to the credit bureaus, my score actually dropped. I thought that my score would have gone through the roof once the debt was gone. Afterall, I am decreasing the total amount of debt that I owe. I thought the credit bureaus would look at this favorably and boost my credit score. Nope, didn't happen.

Here is what happened to my scores - listed by credit bureau:

Equifax: Score prior to car payoff - 769, score after payoff - 743
TransUnion: Score prior to car payoff - 743, score after payoff - 732
Experian: Score prior to car payoff - 732, score after payoff - 728

Ok, so what is the deal? I checked to make sure that Chase Auto Finance had marked the account correctly. They listed the account as paid in full with a zero balance which is how it should read. I haven't taken on any new debt at all. I haven't applied for any new credit so there are no new credit inquiries that could have pulled my score down.

I waited patiently thinking that maybe this was just a temporary drop. Here we are two weeks later and the scores are still the same! It's not a big deal as they are still pretty good scores and I don't plan to apply for any loans or additional credit cards. I just want to understand WHY?

Anyone else have this happen? If you are reading this and you have a firm grasp on how credit scoring works, please share your thoughts.

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14 comments

  1. FrugalWannabe // June 23, 2008 at 9:27 AM  

    I'm no expert, but I've heard that a big part of your score is the amount of credit you have open and the percentage of that credit you have utilized. When your car loan was open, and you had almost paid it off, that percentage was small... but now the loan is closed, so it doesn't count as 0% utilized of x amount, but only counts your other open credit lines. Clear as mud?

  2. paradigmshifted // June 23, 2008 at 10:36 AM  

    I think it has to do with the type/diversity of loan/debt that you have. You used to have (in order of best to worst) a mortgage, an installment loan, and revolving debt. Now you have a mortgage and revolving debt, so you've taken out the second best type of debt. So, you'll see a dip. But it should be temporary, as the revolving debt continues to drop as well.

    Another thing you could do is take your credit card debt and put it into an installment loan, but then you run the risk of having a higher APR.

  3. sara l // June 23, 2008 at 11:05 AM  

    From what I know about credit scores I agree of paradigmshifted's comment.

  4. SingleGuyMoney // June 23, 2008 at 11:27 AM  

    @paradigmshifted: I don't have anymore credit card debt. The credit card debt that is showing on my credit report is about $200 from last month and that has been paid. I only have mortgages and student loans.

  5. Braunn // June 23, 2008 at 12:02 PM  

    With the same caveat as FrugalWannabe (I’m no expert), I’d agree with that assessment. From what I’ve read/learned, your credit utilization is one of the major factors in your score. That is, how much of your available credit are you currently using?

    Let’s say that before the payoff you had:
    Credit Cards: $0 (balance) / $5000 (limit) – you said you had no outstanding balances
    Car Loan: $500 (balance) / $5000 (limit)
    Student Loan: $10,000 (balance) / $15,000 (limit)

    So, you were utilizing $10,500 of $25,000 available. Note that for installment loans, the “limit” is simply the highest balance ever recorded on the account – usually the starting balance. In this example you were ($10,500/$25,000) 42% utilized.

    Being an installment loan, however, once you paid off the balance, the account registered as closed – no longer listed as a balance nor as available (unlike revolving credit). So now your utilization is:

    Credit Cards: $0 / $5000
    Student Loan: $10,000 / $15,000

    Or ($10,000/$20,000) 50% utilized.

    While your outstanding balances decreased, your credit utilization increased because the car loan, being paid in full and closed, is no longer being included in the calculation at all.

    Again, I’m no expert, but this is my current understanding of how things work.

    ~B

  6. Anonymous // June 23, 2008 at 12:03 PM  

    I think frugal and paradigm are both correct. Your total available credit has decreased, and your type of credit has shrunk.

    Plus age of accounts is also a measure, so when the car loan ended, you also lost the age of that account.

    The score is based on credit use, not non-use. Since the other accounts are closed you can't use them, so no points for those paid off and closed.

    Don't close the credit card when it is paid off and you will retain that credit line.

    Still you have about as high a score as you could hope for, and any higher would not benefit you anyway. You're doing great!

  7. paradigmshifted // June 23, 2008 at 2:00 PM  

    oh, in that case, then i agree with the first and last posters - when the car loan account closed, it took away that amount from "total available". was the car loan older than the student loans? are your credit cards still open?

    i wouldn't worry too much about it - it will slowly start to go back up again as you continue to make payments on your student loans...

  8. Anonymous // June 23, 2008 at 3:16 PM  

    Braunn has said it the best so far. This is the reason why you are advised not to cancel credit card accounts, even if you never intend to use them again.

    It's just about the stupidest thing I've heard of, but that's the way it is. Don't worry, the scores will head back up to where they were over time. It's just a temporary hit.

  9. Student Financing and Planning // June 24, 2008 at 11:47 AM  

    I completely agree with the constricted level of credit - but the diversity in the types of credit you hold and LENGTH of credit is also very important.

    By removing this diversity and long-term loan, you were lightly dinged. However, with such great credit history it's almost better to pay off those loans and extra interest!

  10. Anonymous // June 24, 2008 at 11:52 AM  

    If you paid off your car loan and you don't have credit card debt--I'm confused--what is the rest of your non-mortgage debt? Student loans?

    Your score is great--no worries. As Dave Ramsey says, a FICO score is a debt score. I want mine to stay high, too--but it makes me sick when I think about how it got to BE so high (10-plus years of being in credit-card debt and making regular payments).

  11. Anonymous // June 24, 2008 at 6:50 PM  

    Delurker here.

    Paying off your car loan does not have anything to do with utilization because it is an installment account. Something else could have changed or you could have been bumped to a new scorecard(probably what happened).

    Are the scores you listed from myfico.com or somewhere else?

  12. (not) the Jet Set // July 1, 2008 at 11:08 AM  

    Right. This is where you find out that your credit score has nothing to do with financial success. It is not a measure of winning. It measures length of debt, type of debt, amount of debt, available debt, timeliness on debt payments, debt, debt, debt, debt. It's a debt score.

    What's more concerning than a drop of a few points is that you're watching it so closely to notice. Why waste your time?

  13. Sebs // May 3, 2009 at 2:23 AM  

    I work in the lending industry and "credit utilization" only goes off the revolving accounts. It's actually referred to as revolving utilization. So paying off student loans, car loans and mortgages does not affect your revolving utilization. But credit scores do take into account the diversity of loans you have, and getting the auto loan paid off might decreased your diversity. But just keep making all your payments on time, and also you should actually try to use the credit card for a small purchase each month because that will keep building payment history on those accounts, thus helping with the diversity bit.

  14. joe.young // November 7, 2009 at 9:28 AM  

    it only affects your rating once the lender reports it to the bureau. but take note, there are a lot of factors that would affect your score.