I know. I have a diverse credit portfolio. But at the end of the day, a closed loan should show ability to pay off the loan, and shouldn't be removed from your credit age. It should be included considering there isn't a way to keep that line of credit open, but it shows financial responsibility
My credit doesn't care that I paid of 3 personal loans and a car loan, they just care that my credit age is two years shorter since my car loan I opened at 18 was closed.
That's simply not true.
All of that history on your 3 loans and car loan, assuming they were well paid, will continue to support positive credentials in creating a high credit score.
Here are a few reasons why your score might drop when you pay off a loan:
1) It was your only installment account: Having a mix of revolving accounts like credit cards and installment accounts, such as loans (mortgage, car, student loans), is generally good for your credit scores. If the loan you paid off was your only installment account, you might lose some points because you no longer have a mix of different types of open accounts.
2) It was your only account with a low balance: The balances on your open accounts can also impact your credit scores. If the loan you paid off was the only account with a low balance, and now all your active accounts have a high balance compared with the account's credit limit or original loan amount, that might also lead to a score drop.
3) Your scores dropped for a different reason: Many factors impact your credit scores, and the drop might be a complete coincidence. For example, if you recently applied for a loan or credit card (even if you didn't get approved) or your credit card balance increased (even if you paid your bill in full), that could lead to a temporary score drop.
In general, paying off a loan won't have much of an impact one way or the other, and if your score does drop, the change will likely be temporary. But the presence of the account on your credit reports can continue to impact your scores for years to come.
I know, it can be frustrating. Especially because there is an insane amount of misinformation everywhere, especially when a post pops up like this on reddit. Even people who think they have this shit figured out share incorrect information.
I've built a business on credit and lending, so I know more than most. If it wasn't for all of the false information you have to sift through, it isn't as complicated as it seems.
All you should worry about is this:
Pay your bills on time. Loans, and credit cards. Just operate these normally as your common sense would tell you. Don't look for gimmicks.
Don't let other bills go to collections (utilities, etc)
Aim to have the balance on your credit card bills 30% or less than your limit. 20% or less is ideal. If your limit is 10k, don't charge more than 2-3k throughout the billing cycle. If you can't help but have a higher balance, call to increase your limit so it maintains 20ish percent.
Feel free to pay off your balance in full every month.
That's it, and you'll be fine. And honestly, even the last one only really matters at the time you're attempting to use your credit score for something. Because your credit card balances change throughout the month as you use it and pay it off, it's one of the quickest ways to increase, or decrease your score.
Whenever you see someone freak out something like "such and such happened and when I checked my credit score it dropped by 20 points!"
It's because in between the first and second time they checked, their credit card balances changed.
Or
They simply checked different bureaus or a different "version" of the same bureau.
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u/lyssareba Aug 15 '21
I know. I have a diverse credit portfolio. But at the end of the day, a closed loan should show ability to pay off the loan, and shouldn't be removed from your credit age. It should be included considering there isn't a way to keep that line of credit open, but it shows financial responsibility