We Finally Paid Off Our Last Piece of Debt. I Didn't Expect It to Backfire Like This.

"My husband and I recently paid off our car loan early. It was the last piece of debt we had. We did so to prepare for our second child and to purchase a larger car. We ended up selling/exchanging our car for a slightly older car, so we were also able to make a profit even while paying off our car loan. But then something unexpected happened."

"My credit score dropped 50 points on Experian, from the 800s to the 700s. Reviewing my credit report, the only change was the loan payoff, which was listed as positive! I only have two credit cards: a bank card with a spend limit of $45,000 and a store card I rarely use. My usage percentage is quite quite low (well under $1,000 out of the $45,000), and I always pay off my credit cards in full prior to due date. There are no negative reports on my credit report."

FICO scores weight payment history, amounts owed, length of credit history, new credit, and credit mix. Closing or paying off an installment loan can change the profile of active accounts and reduce credit mix, which can temporarily lower a score even when the payoff is reported positively. Different scoring models and differing account portfolios can cause unequal impacts between partners. Scores typically recover with continued on-time payments, low revolving utilization, and time. Maintaining longstanding accounts open, keeping revolving utilization low, avoiding unnecessary new credit, and monitoring credit reports and scores can help restore and preserve high FICO scores.

Read at Slate Magazine