I had a perfect 850 credit score. Then I paid off my house.
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I had achieved the holy grail of credit usage, a perfect 850 FICO score.
Then, I paid off my mortgage.
But many consumers in the FICO top tier often bemoan losing points after paying off a mortgage or auto loan. Over the years, readers have shared:
- “I paid off an auto loan early by a year, and my score dropped 30 points.”
- “When we finished paying the loan on a car, my score took a 50-point drop!”
- “My wife and I paid off our mortgage, and our score dropped from 850 to 822.”
I’ve tried to assure consumers that there’s no need to be concerned about a score decline that doesn’t push you into a lower credit tier, which could affect your ability to get the best loan terms or a better rate for home or auto insurance.
How I got a perfect 850 credit score
I first hit 850 in 2018. Except for a tiny dip for one month after applying for new credit, I maintained a perfect score for several years — until the mortgage payoff, which was prompted by my husband’s retirement.
How can doing something so right affect your credit history so negatively?
The answer lies in understanding how the credit-scoring algorithm works.
The best known and most widely used credit score is FICO, which rates consumers on a scale of 300 to 850. The higher your score, the better borrower you’re considered to be.
No, you don’t need a perfect 850 FICO score to be an exceptional borrower
Your score is based on information in your credit reports from Experian, Equifax and TransUnion. So, you can have different scores depending on the credit file that is pulled. I check various scoring models. (They all had shown an 850 until the mortgage payoff.)
FICO scores are calculated using data in your credit report: payment history, amounts owed, new credit, length of credit history and credit mix (mortgages, auto loans, etc.).
Each category is weighted and reflects how important it is to your score. Your payment history represents 35 percent of your score, followed by 30 percent for amounts owed or “credit utilization,” which is how much credit you’re using compared with your total credit limit.
Your length of credit history is 15 percent. New credit accounts for 10 percent.
Your credit mix, which includes installment loans (mortgages, auto loans, etc.) and revolving accounts (credit cards) also is weighted at 10 percent. A mix of credit usage can illustrate to lenders that you can obtain and manage different kinds of debt.
Mortgages are considered in several categories, including length of credit history, credit mix calculations and payment history, said Ethan Dornhelm, vice president of scores and predictive analytics at FICO.
FICO scores weigh the amounts paid down and balances of mortgage and nonmortgage installment loans against the original loan amounts, Dornhelm said.
Paying down the loan can have a positive impact on your credit score, he said.
In addition, if you don’t have many other established credit accounts but have been making your mortgage payments on time, that helps establish a history of responsible credit management.
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The best things you can do to boost your score are to make on-time payments and pay down your debt.
But here’s why your score may drop after paying off an installment loan.
Once you repay the loan, it’s no longer in the credit mix category.
Dornhelm said FICO’s analysis of millions of consumer credit files has found that having a low installment-loan-balance-to-loan-amount ratio is simply a little less risky than having no active installment loans at all.
The elimination of data that demonstrates active, regular, on-time payments may mean some consumers see a temporary dip in their FICO scores, he said.
With time, you should see your score rebound as long as you continue to demonstrate positive credit behaviors such as on-time payments and a manageable level of overall debt, Dornhelm said.
The FICO scoring system distinguishes between those who have never had an installment loan and those who have had years of this type of loan experience.
It’s also important to note that an installment loan, even after it has been paid off, continues to positively affect the length-of-credit-history category.
“It is possible to score in the 700s range and even higher without any demonstrated installment loan activity,” Dornhelm said. “But if a consumer is seeking a perfect FICO score, they will need to be perfect on all dimensions considered by the score, including credit mix.”
Those with an 850 score generally have no history of missed payments, collections or derogatory information. The average age of their oldest account is 30 years. They seldom open new accounts, applying for credit only when necessary.
You might have been following the advice to keep your revolving credit card utilization at below 30 percent. That means if you have an available credit card limit of $10,000, you shouldn’t have more than $3,000 outstanding at any one time.
As of April, the average revolving credit card utilization was 4 percent for those with an 850 on the FICO Score 8 credit model, Dornhelm said.
Don’t worry about achieving a perfect credit score. Only 1.7 percent of scorable U.S. consumers had an 850 score.
“The most important thing to keep in mind is that lenders do not require a perfect credit score to provide the most favorable credit terms,” he said.
Typically, lenders lump potential borrowers in tiers based on ranges within a scoring model. For instance, when refinancing a mortgage, a lender might reserve the best customer category for consumers with a FICO score of 750 or higher. For some lenders, their best rate tier might start at 700.
In the months since I paid off my mortgage, my FICO credit scores have been rising.
It’s now at 846 based on FICO Score 9 using Equifax data and 841 using information in my Experian credit report.
That’s more than good enough.
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