Okay, credit stuff is stupid

[DZoolander]

I've got good credit, and I've never really given it much thought. Over the past few years, however, I've started taking more of an interest in watching my credit fluctuations. Maybe I'm just getting older and bored...who knows.

So, just had something happen on my credit report that piqued my curiosity.

Do you think that paying off an auto loan would be a good thing, or a bad thing, on your credit?

This month I finished paying off my wife's car. The balance came under $1k, so figured might as well just be done with it. What happened as a result of that payment? My credit dropped by 10 points.

To be honest, I don't care all that much because I've got good credit even with the little hit, and I'm not looking to take out any loans. So, in the grand scheme of things it doesn't matter really. But the reason given is because the account closed, and apparently accounts closing can have a detrimental impact upon your credit.

Go figure.

 

[Hetta]

I really wouldn't worry about it TBH. Better to be debt free and have a "lower" credit rating than be in debt.

 

[WolfGate]

EZoolander - Hetta's right about what is important (you know that).

I'm not surprised, however, that closing an account can have that type of impact. 10 points is a very minimal adjustment, so the scope is about right. Remember what the purpose of a credit rating is - to give lenders an objective score showing your ability to responsibly use credit and history to support that. To demonstrate that, you have to be responsibly using credit. Since the score is based on criteria across a large population of people, they expect the lowest risk borrowers to have a range of credit accounts - not too many and not too few. Move towards the edges of that range either way and score will drop minimally. Move towards the middle and it goes up. All risk assessment. The biggest impact to your rating, as expected, comes from paying the credit that you do have on time.

Other things come into play. We have excellent credit, and I also have two cards that I use for business travel (reimbursed by my employer) so they are paid in full every month. Depending on travel, at any given time my open balance can swing by thousands of dollars, affecting the % of credit used portion of my score. I'll also see those small swings throughout a month just based on that. It's no big deal.

 

[Dave-W]

EZ - the way I understand it, it makes sense. You had a loan out - for how much originally? 25k? 30k? And now that account is closed, which means that 25 or 30 k is now available for you to take out as a loan that was not there before the account closed. So your score goes down.

 

[Hetta]

If it really bothers you Ezoo, you could open a CC that has benefits like cash back or whatever and use it every month for purchases - make sure to pay off the balance each time. That would push your credit back up, at no risk. I have a CC through my bank that I use because I get % back on my purchases. I pay it off every month, so I don't owe anything. I transfer the % cash back into a savings account. It's only small - perhaps $30 pm - but it's $30 I didn't have before.

 

[HannahT]

EZ - I don't know all the factors that go into credit scores. I do know a friend of mine paid off something recently, and her scored dropped too. Within months? It started to climb back up. Go figure.

I have a excellent credit score, but it notes that I could use more 'open accounts' of different kinds. I'm not sure what that means. We have a mortgage, a credit card, and when I apply for utilities it shows up. We just switched cable companies. My car has been paid off for a while, and so maybe they want me to buy another one! lol! That would give me a 'different type' of account.

I remember a couple of months back we were visiting some land we purchased for our retirement. We decided to have some work done on it at the last minute, but I didn't bring the checkbook. We put it on the card, and then paid it the next month. My score went down because they decided I had to much on the card compared to the credit balance, and then went back up when we paid it. lol then the credit card company upped the credit limit.

I worked in credit years back, but I know many things have changed. Scores go up and down all the time. Some changes make sense...and others just don't.

 

[98cwitr]

I hate interest and always try to pay loans off as early as I can afford. If it drops my credit so be it.

 

[DZoolander]

lol - well my credit was in the high 700's, and now is in the mid-high...and I've got something like 27 accounts...only utilizing about 5% of my total credit...so I'm not really looking to add any more. It's not a big deal - but rather more of a "hmmm - whodathunkit"