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Why did my credit score fall after paying loan?

Janna Herron
Janna Herron

Dear Credit Card Adviser,
Why would my credit score go down after paying off an installment loan on my car? After my last payment, the loan showed a zero balance, but my credit score went down 23 points. My utilization rate went up a little after paying off the loan, but nothing else changed on my report. Please tell me what happened.
-- Terri

Dear Terri,
Credit scores -- and the algorithms behind them -- can be mystifying, especially if you keep tabs on yours frequently. Trying to decipher how a financial move affects your score can seem confusing or, in your case, counterintuitive. That's because it's almost impossible to isolate one factor's influence on a score among the dozens and dozens of variables a credit score considers.

In general, paying off an installment loan shouldn't hurt your credit score, says John Ulzheimer, credit expert for Credit Sesame. Incidentally, it doesn't boost your score all that much either, mostly because an installment loan doesn't lower your score in the first place. And as you pay it down, you receive the benefit of a lower balance, he says.

The loan also stays on your credit report even after you pay it off, so it will still count toward your mix of credit and length of credit history, which together account for a quarter of a FICO credit score.

There are two other explanations for the decline: You're comparing two different types of credit scores or more changed on your report than you noticed.

There are 53 versions of the FICO credit score in use. Some are older generations that weigh certain factors differently, however slight. Other scores are tailored for each credit bureau, and each bureau's credit report differs because lenders don't always report to all three bureaus. Then, there are scores that are made to predict your risk on specific loan types, such as credit cards or auto loans.

All these scores can differ from each other. That means if you compared two different scores after you paid off your installment loan, you're comparing apples to oranges.

Another explanation is that you missed something on your report that did change. Maybe you applied for a store credit card. Or perhaps you charged more on your credit card than usual. All these can affect your score.

In general, about a quarter of people will see their score go up or down by more than 20 points versus the previous three months, according to Anthony Sprauve, the spokesman for myFICO.com, the consumer education division of FICO. You fall into that group.

My advice is to keep up on your debt payments and maintain low balances. If you don't need new credit right now, that 23-point drop will right itself as you consistently show responsible financial habits. Good luck!

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