Credit score took a dive after I paid off school loans...?

Question

I recently paid off the last of my school loans because I intend to buy a new car soon and wanted to have my other debt out of the way before I take out an auto loan. As the information has come into the three credit bureaus, I have watched my Experian score drop six points, and my TransUnion score drop a whopping FIFTEEN points! (News that I've paid off my loans has not made it to Equifax yet, but I'm already braced for the drop.)

What gives? I don't understand why I'm effectively being penalized for paying off my debt.

EDIT: Nobody is ever penalized for checking their own credit. The only thing that has changed on my reports is the number of CLOSED accounts I have. I understand that closing the number of open accounts you have by closing credit card accounts negatively impacts one's score, but how can it be bad to pay off an installment loan?

http://www.myfico.com/CreditEducation/WhatsNotInYourScore.aspx

Answer 1

I'm not certain but it could be that you no longer have any installment loans. I think a part of the scoring method is based on a mix of revolving credit and installment.

I know that paying off a mortgage lowers your score if you don't have another mortgage.

Equifax uses FICO while Experian and TransUnion use their own scoring method. Maybe FICO will figure it differently.

Hopefully you score will rebound quickly. In any case, creditors look at more than just your score. They take the whole credit report into consideration.

Congratulations on getting those student loans all paid off. I'd give you extra points for handling your finances so well.

Answer 2

Well One thing that drops your credit ,,is inquiries ,, which you are making each time you check your credit! That can explain a 6 point drop,,! or maybe even a 15,, the thing is there is no exact science to a credit rating! People can understand it, have great knowledge of it,, yet never , ever master it! (that is why you will have a diff. # @ each agency)
You should never get penalized when you pay off a loan , or anything,, BUT it does happen all the time! If you pay it off early , that can hurt some loan types, or if you pay off a loan that was way past due,, written off ,, that can hurt you sometimes too!
The truth of the matter is we need a credit reform,, a standardized formula has to be achieved soon!
Credit is the Death of America!!

edit: I would look to join a credit union,, you can get much better rates than a regular bank! Many will let non-union people join anymore!
edit: You people are so STUPID if you think that your credit is not effected on each inquiry! Yes you get ONE free , no harm , look each YEAR.. Now if you keep checking it ,,YES it will Lower YOUR RATING!!
Your car insurance can , run your credit up to 4 times a year,! and most do anymore,, WHY , well everyone is running credit now days ,, they realize that they can make much more money doing so,,!! (shoping around for a new Insurance policy WOW that could drop you afew points in one day)Get a cell phone,, they run your credit,, MY Point is each time you do something ,,giving your ss# they are running your credit ,if they make it know or not,, !! Many things effect our credit that most people are JUST BLIND TO..

Answer 3

From what I understand, your credit rating is determined in part by your ratio of debt to available credit. When you paid off your student loans the credit bureaus may have considered your student loan account closed, and thus your available credit went down, at least on paper. Also, you are penalized for checking your credit, although it shouldn't have dropped you by 15 points. I think your credit score will get back to its previous level pretty soon, assuming you keep paying bills on time.

Answer 4

Inquiries might hurt a little. But do you have other trade lines in good standing with balances? If not, you were penalized because you are not utilizing credit any more. You are scored for proper using the credit, but for not having it.

Answer 5

I would have to agree with bdancer. If you have no other installment credit this could lower your score.

10% of your score is based on the types of credit you have.

Answer 6

your EDIT is incorrect. You get one free credit report per year. meaning you don't pay for it and it doesn't affect your beacon score. it doesn't matter WHO is checking your credit be it yourself or someone else. granted, your beacon shouldn't go all that much, but for some, every point counts.

Answer 7

i dont know everything about it
however evertime you have your credit checked or go on line and run it you lose points