Not sure what her financial situation is, but if the loan on her car was the oldest thing on her credit report paying it off will lower the average age of her credit history and that can lower your score.
If she had a credit card that was opened before she got the car loan and never missed a payment on the credit card, paying of the car would have raised her average credit history and raised her score.
It’s not some secret how this stuff works, Credit Karma tells you all this.
Why would paying something off lower your credit score though? You should be rewarded for that lmfao.
you misunderstand the function of the score. it’s not a score that tracks how reliably you pay back your debts, it’s a score that tracks how profitable you are as a debtor. someone who pays it all back before masses of interest can accumulate is not profitable. someone who doesn’t pay it back and drowns in the interest is also not profitable. the best scores are for the people in between, who make the creditors lots and lots of money consistently.
It’s for this reason that “building credit” over time is ridiculously easy if you game it properly - it’s basically pay to win. the more consistently you pay interest but without looking like you’re drowning, the happier they are. it’s why having some utilization gets you better scores than paying everything off completely and having 0 utilization every month.
i agree it’s very stupid in terms of incentivization and think it’s probably the worst measure of social value we could have arrived at.
You understsnd that we all know how it works, that doesn’t mean it’s any less hokey or bullshit.
“…we base our entire lives on”
The vast majority of people barely think about their credit score
Well yes, but also no. Buying a house or getting a mobile phone (a car too, but less so) are pretty essential parts of functioning in society.
Who the fuck needs credit to get a mobile phone? lmfao
That Android better be gold plated, able to use every network possible in the world with satellite without roaming, and shit out by Taylor Swift herself.
As a brit who moved to America with a company sponsored visa and half decent full time job I could only get a 250 dollar credit card and a pay as you go phone.
It’s even being involved in job interviews and renting a house. I’m sure a bunch of others as well.
Yeah you only care about credit score when you’re young. I dont base shit off my credit score
A 35 point drop should either be a temporary blip, or a result of having practically no other credit.
A significant portion of your credit score is the average age of accounts. When an account closes, that is no longer accumulating time (this is also why you should just keep credit cards you aren’t using open, and if they have an annual fee, have the issuer change it to a free card if they can, I.e Chase Sapphire down to Freedom).
Another portion of the score is debt-to-limit ratio. If that goes from $250:$10,000, down to 0:0, you look a lot worse as a credit customer.
I don’t think that changes the fact the system is illogical and stupid though. It’s way too basic a system if that’s how they’re running it.
It’s pretty good for most people. There will be outliers.
The problem is, we have massive faceless banks that cater to nearly everyone. They need some system to gauge how much of a risk an individual lendee is.
The only real fair way to do that is based upon their reputation with other creditors over the past so many years. There’s a lot of metrics they can use ti measure that reputation, but all of them suck if you have little-to-no reputation to begin with.
Small community banks and credit unions had some more flexibility here since the bankers knew you, personally. However, I think it’s pretty obvious how subjectively judging someone’s credit worthiness can have some serious consequences based upon any -ism or -phobia you can name.
This is the kind of thing that seems good on paper, but in practice it alienates anyone on the outside of it. If you’re born into a low credit score (i.e. born poor) you’re automatically at a disadvantage. No one will lend you any money because you have a certain score, which in turn means you’re never given an opportunity to improve your score. When credit scores start including rent payments, I’ll be open to seeing it as equitable.
From what I understand it’s a pretty shit system that doesn’t work that well.
From the example posted here, it’d be extremely trivial to set up a system that doesn’t deduct points because you paid off a debt. That makes zero sense.
Some dude may have come up with a basic model 20 years ago but it needs updating - any half decent data scientist at this stage would be able to build a better system.
Maybe we just shouldn’t have massive faceless banks then? No one is asking for that
The system was built around the needs of the upper middle class and it suits them just fine. Someone earning $500k+ per year will have a whole lot of credit cards, loans, mortgages, etc. That diversity helps them generate the scores they need.
You’re spot on. I do want to point out, though, that upper middle class in the US is a household income of 90k to 150k. 500k would be solidly upper class. My apologies if you’re referring to a different country.
I’d say inb4 someone high on copium tries to justify it, but I’m already too late.
Tell ya what, I got a plan! We go back to the way it was before credit scores. If you’re white, socially acceptable, know your banker and are a deacon in your church, you’re approved!
“nOt LikE thAT!”
Children: I don’t understand how this works so it’s unfair!
Normal countries don’t have credit scores. It’s once again a US-only problem.
Lmao what? I’m from a third world country and credit score is a thing here.
Wait… Seriously?
I knew it was ridiculous (literally two companies who assign you a numeric value in an arbitrary range and refuse to elaborate why)
But I never considered other places not having some version of this, probably run by the government (or are just using ours)
Can you walk me through how getting a loan works? Let’s say a home loan, what would they ask and what decides the terms you get?
There is a lot of misunderstanding about credit scores posted here.
The purpose of credit scores is to answer only one question:
How good are you at pay back a debt if someone were to loan you some money?
Thats it. Everything on how the score is calculated is weights and measures to service that question.
The reason that making payments on an active loan improves your score, is because it is real proof you are getting money from somewhere (the credit score doesn’t care where) and you’re choosing to spend that money on an agreed payment on the debt. Lets say I’m a lender and I’m considering giving you money, and I see that someone prior to me make a similar agreement, and you’re honoring that agreement to pay, then it gives me a good reason to think you’ll also pay on debts you have with me. The reason your score goes down when you pay off your last loan, is because I can’t see you still have the money to pay on a new loan. It means you’re a (slightly) higher risk because I’ll have to take it on faith that where ever you got the money to pay off the last one, you’ll also be able to get that money to pay off the one to me. There’s no guarantee for that, so its a risk to me, a lender.
Another thing I’m seeing missing in the discussion here is:
“Doing X makes your credit score go down”
Technically true, but many of those things that make it go down only do so for a short time. Maybe a month or two (using modern FICO score system).
There can be arguments as to which inputs they use, and how much each of those inputs affects the score. So much so, rating agencies themselves even change their minds over time. They update what they think is important and downgrade what they think matters less. You’ve likely heard of a FICO score. Over time there have been SIXTEEN DIFFERENT VERSIONS of what makes a FICO score source. Some of the variation you see when you get your score from different places is those places using slightly newer or older versions of the scoring system.
Unfortunately lots of organizations that have nothing to do with lending you money are choosing to use your credit score for their own systems. I’ve heard of insurance companies using FICO scores as inputs to how they calculate premiums, which they shouldn’t do. Some employers are using these now to filter applicants. Those employers are perverting the credit score system (again, a system just for loaning money) as a measure of trustworthiness or fidelity. I wouldn’t mind laws that prevent that as that isn’t what credit scores are designed for, and doesn’t answer that question.
How good are you at pay back a debt if someone were to loan you some money?
That’s the point!!!
The only information we are given is that the OP paid off a debt and the credit score went down. You claimed that maybe it is only temporary. But that still goes against your giant text claim.
Why does paying back a debt announce that you are bad at paying back a debt?
It doesn’t say that. You’re drawing your own conclusion from the score decrease. Also, I didn’t downvote you.
The only information we are given is that the OP paid off a debt and the credit score went down.
If that was the OPs only long term debt being serviced, (credit cards don’t count), the credit agency now has no proof you can CURRENTLY pay off a new debt. Meaning OP is a slightly higher risk.
Credit agency has no idea where the money came from that paid off the debt. It only knows that OP was regularly finding money somewhere, and that OP was putting that money toward debt as agreed. Did OP lose their job after paying off the debt and doesn’t have income anymore? Did OP have someone else helping them pay that that person won’t help in the future? The credit agency has no idea. It only knows that in the past they were able to service the debt, and today they have no way to measure if they can. So it is a slight increase in risk, meaning slight decrease in credit score.
All of that is technically true, but still kind of a shit policy as it consequently raises the cost of borrowing on someone who paid back the full loan plus interest.
You can rationalize all these shit policies with any number of talking points. Some of them might even be actuarially sound. But they’re still shit.
The first part of what you say is still off even. Its based on other factors like debt to income, income amount and credit utilization. different lenders also use different calculations depending on the type of loan. For example a mortgage wont be the same as an auto loan and theres even a system for renters the scores can vary wildly and really the numbers dont even mean fuck all half the time. Underwriting is a whole career and a company doing lending that knows anything will look at how well you actually pay your obligations and weight it with how much you make, practically ignoring the score itself. Ive seen people with 350s get top tier financing and people with 700s without even a thin file (low history) get completely denied or stupid interest rates.
For reference I havent missed a single payment in my entire life, my credit is damn straight outside of some credit utilization on low limit cards and because of that my score is “mid” i dont really care at all though cause chasing the number will stress you out and you wont benefit much from it if you just make your payments anyways. Ive still gotten approved for most things ive applied for because of making my payments
Its based on other factors like debt to income, income amount and credit utilization.
You’re off on some of your measurements. FICO scores are based on only 5 inputs:
- payment history (35%)
- amounts owed (30%)
- length of credit history (15%)
- new credit (10%)
- credit mix (10%).
different lenders also use different calculations depending on the type of loan.
I already touched on that with the 16 different types of credit scores: source
Underwriting is a whole career and a company doing lending that knows anything will look at how well you actually pay your obligations and weight it with how much you make, practically ignoring the score itself.
You’re right that underwriting is a whole career, but we’re not talking about underwriting. We’re talking about FICO credit scores. You’re bringing in things that aren’t credit score, but are factors that lenders use for determining loan worthiness and interest they charge, but that isn’t FICO credit scores.
Myself and OP are talking about the price of apples here. You’re asking me why an apple pie costs so much. Yes, apples are an ingredient in apple pies but not the only thing that influence the cost of the pie.
No it isn’t. It’s to force you to use credit under the guise of checking how good you would be at paying back.
I’m from europe, you know how much credit i had before i got a loan for my condo? absolutely zero. All they needed to know was that i had no debts, lived well within my means, knew what i was doing, not “how many credit cards and car loans have you got running”. The best possible person to loan money to is someone with 0 credit history who can prove they’ve got a solid source of income, and are living well within their means. Because you know, once i bought my condo, paying my loan is the exact same thing as paying my rent.
And if you wonder if i got a decent loan with such a “terrible credit history”. It was a loan with variable interest rate, after the first change, my interest dropped to 0 due to the financial crisis, and it remained at 0 until i paid it of.
Anyone actually believing the american credit score system is anything else than just a way to force you to use credit while you really shouldn’t, is just indoctrinated. I’m sorry, but someone perfectly paying rent, and saving up for purchasing a house without ever using any credit is the perfect person to give a good mortgage too, and the exact kind of person this system sets out to punish because they’re not taking part in the American banking system the way the banks want you to.
The best possible person to loan money to is someone with 0 credit history who can prove they’ve got a solid source of income, and are living well within their means.
Okay, so the “solid income” component is easily provable.
How can a lender know you’re living well within your means?
I’m sorry, but someone perfectly paying rent, and saving up for purchasing a house without ever using any credit is the perfect person to give a good mortgage too
Paying rent is NOT equivalent to paying a mortgage. With rent, you’re responsible for only making the rent payment. Nothing for housing upkeep and repair. Almost zero liability on how you keep your home could make you open to a law suit. No renter has to pay for the replacement of a roof or complete replacement of HVAC. Skills developed only to pay rent are insufficient for home ownership. That doesn’t mean a renter can’t grow to those home ownership skills too, but it isn’t equivalent as you’re suggesting…
Someone else already replied, but about living within your means, lenders can look up other debts you have, and missed payments you have. And they all request access to your pay slips so they get a basic view of your income. In the end it’s close to the credit score system, with the difference that someone who doesn’t have any loans or credit cards willl also have a good score since they don’t have any missing payments, and haven’t gathered too much debt already, which makes sense.
Regarding your point of rent vs ownership. In the end you can still boil it down to needing a certain amount of money/month. Only part of it is your mortgage of course, you need to save up for bigger things, but it’s not that different. And i don’t even see this being relevant in this discussion, i don’t see how the credit score system would predict you being up to being a house owner and setting money aside for bigger repairs.
How can a lender know you’re living well within your means?
It basically goes like this: here (the Netherlands) debt is registered, including what your monthly payments on those debts are. When you want to get a new loan you go to the bank with proof of income, they then look at your existing debt / payments and make an estimation of your cost of living. You will only be approved for a loan if monthly payments for current and the new loan + cost of living < your income.
You’re not supposed to be able to borrow more than you can afford the payments on.
Of course you can still get into trouble if you have a sudden drop in income, but at that point you can’t get any additional loans.
They also register non-payment of debts, not just on loans but also on things like energy bills, rent, cell phone plans, etc.
The best situation is that they have no records on you, because that means that you have no outstanding debt and no failures to pay.