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Effect of Paying Off Your Mortgage on Your FICO Credit Score

Written by Nickel - 59 Comments

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Have you ever wondered what sort of impact paying off your mortgage would have on your credit score? I have. In fact, that’s the primary reason that I signed up for a free trial of MyFICO ScoreWatch late last month.

Well… I now have my “before” and “after” credit score, and guess what? It went down! At the time we paid off our mortgage, I had a FICO credit score of 781. Fast forward a few weeks and I got a ScoreWatch e-mail alert. Bingo. Just what I had been waiting for.

When I logged in, I saw the following…

Which was followed by this little gem…

Just to be sure that the mortgage was to blame, I poked around a bit more. And… Boom goes the dynamite:

The only change they were showing was our lump sum mortgage payoff off which resulted in a zero balance. Interestingly, when I read on about how this change might impact my credit score, I learned that:

“Generally, less debt is better for your FICO score.”

(in case you can’t read it, that’s the bit underlined in red)

Hmmm. It’s generally better, but clearly not always.

I’m no FICO credit score expert, but my understanding is that the decrease occurred because I no longer have any installment loans. Apparently their algorithms aren’t smart enough to distinguish between people who’ve never had an installment loan and people who’ve had one, never made a late payment, and paid it off within the past month.

Anyway, I’m not sweating it, but I thought it would be worth tracking to see what would happen. I also thought some of you might be interested in the outcome. Thoughts?

Published on January 22nd, 2010 - 59 Comments
Filed under: Credit Cards,Debt Reduction,Mortgages

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. For some odd reason, this just makes me more determined than ever to pay off everything and live debt-free! FICO is just something that’s created a mindset that debt is a necessary part of life. If you have no debt, no mortgage payment, who needs a good FICO score? After all, a good FICO score simply indicates how good your relationship is with debt. So silly!
    Your numbers going down just makes me all the more suspicious about the whole intention of creating a FICO score in the first place. They want us to have debt! No more, I say!
    I’m done now. 😉

    Comment by Anonymous — Jan 22nd 2010 @ 8:40 am
  2. Interesting… My credit score generally hovers around 780 – 800. My credit union (PSECU) graciously gives me a free update on it each month. The main thing that seems to keep my score from going even higher is that I use a high percentage of the credit available on my credit cards. For instance, my main credit card only had a limit of $2,900 for quite a while and I routinely charge over $1,100 on it each month–I charge pretty much anything I can to maximize the 2% it pays in cashback. Then I pay it off EVERY month. True I’m using a good portion of the available amount, but I never have late payments and I always pay it off every month. The wonderful FICO folks still give me a little ding for doing this. I think Dave Ramsey is right about “not worshipping at the altar of FICO”–meaning that you don’t need to worry so much about FICO if you know you are working towards getting your financial house is in order. 🙂

    Comment by Anonymous — Jan 22nd 2010 @ 9:04 am
  3. I couldn’t resist, I just found this quote from Dave Ramsey about the FICO score…

    It’s not an “I’m winning at life” score, it’s an “I’ve been kissing the bank’s butt on a regular basis” score.

    Here’s a link to the page with the quote:

    Hey Nickel, now you can think of your lower score in a more positive light–you are winning at life! 😉

    Comment by Anonymous — Jan 22nd 2010 @ 9:15 am
  4. I don’t care about my FICO score unless I’m trying to get a big loan, which hopefully is something that I can plan for way in advance. Another thing is that most property insurance companies use your credit score as a factor in assessing your premiums.

    apparently the risk of you filing a claim in correlated to your credit score (lower score = more likely to file a claim) go figure.

    Comment by Anonymous — Jan 22nd 2010 @ 9:36 am
  5. If the FICO is used to measure if a borrower is “Willing and Able” to borrow money, then repay it. Accordingly the score should go down as you don’t carry a large debt to income ratio.

    I think in Nickel’s case should he want to borrow $250k from another bank, say for a vacation home. The lender would look at past payment history, weigh that against other items (e.g. D/I ratio, Time elapsed since last large loan, available collateral, etc).

    Thus from a lender’s view the FICO is probably accurate – since it went down. From a borrowers view (or at least mine when my Mortgage Pay off day arrives), the bank can pucker up and kiss my @ss.

    Comment by Anonymous — Jan 22nd 2010 @ 9:40 am
  6. Same thing happened to me. Paid off the Mortgage, bought a new car for cash (modest, though :-)), and closed a 100K home equity line of credit that I never used all in the span of 2 months and my credit score went down. Must make me less valuable in the eyes of a lender.

    I think ‘Budgets are the New Black’ is right on target with his comments.

    Comment by Anonymous — Jan 22nd 2010 @ 9:58 am
  7. If you are prepared to pay off your home you should not use every penny to do it. A home loan is one of the cheapest loans (percentage wise) you can get. That’s one reason its one of the last debts you should pay off. So if you are in a position to pay off your home make sure you have ample savings to meet your other needs. I wouldn’t want to pay off my house and be left with only a few thousand in the bank and then total my car. I’d have to go out and get a car loan (the next to last thing I’d want at that point) or use up emergency savings (the last thing I’d want to do).

    Comment by Anonymous — Jan 22nd 2010 @ 10:09 am
  8. Yes, the same thing happened to me. We paid off our mortgage and (with no other changes to debt) my score went down almost 30 points. I wouldn’t care except that we are thinking of turning this house into a rental and getting another mortgage for a new house in the next year or so. Hoping the bank can actually think independently of the numbers and say, “Oh look, they paid off a thirty year mortgage in 10 years; they’re probably a good risk.”

    Comment by Anonymous — Jan 22nd 2010 @ 10:10 am
  9. I’m not sure you remember my rant against FICO on an earlier article of yours:

    Paying off debt only hurts your score. My advice is to ignore FICO and pay off debt anyway. It is not worth it to me to pay banks hundreds of dollars in interest a month to keep a credit score up.

    I’d love to see what reasons Andy Jollis (author of the other guest post and FICO insider) has to say about your score dropping after paying off a mortgage.

    FICO is a joke.

    Comment by Anonymous — Jan 22nd 2010 @ 10:37 am
  10. is it true what bodark says about the lender looking at much more than the score? I have been hoping that is the case when I go for a mortgage loan in the next few months since we’ve paid down all of our debts but one student loan…glad I read this post.

    Comment by Anonymous — Jan 22nd 2010 @ 10:44 am
  11. Yep…my score went up a bit when I added an additional $200K in debt to it via a mortgage. Craziness!

    Comment by Anonymous — Jan 22nd 2010 @ 10:59 am
  12. I’ve heard FICO score referred to as an “I love debt score.” HA!

    The more TYPES of debt you have helps the score. Oddly enough, when I took out a loan for a car I bought several years ago, my score went UP (granted, not by much, but it still went up). At the time, it was interesting to look at mine & my husband’s scores b/c we had nearly the exact same credit history EXCEPT for that new car note. His score was an 806, mine an 813 (Yes, FICO. not those scores reported by other agencies that use a 900+ scale)! Which, really, I found rather odd as well (scores that high), since we had only a mortgage, and a handful of credit cards that never had balances. Well, ONE CC always had a balance reported, but we paid it off monthly, so it was never much.

    I couldn’t tell you what my FICO score is now and I couldn’t care less what it is – I never plan to borrow for anything again 🙂

    Comment by Anonymous — Jan 22nd 2010 @ 11:02 am
  13. A drop of 17 points out of 550 possible scores is a 3% reduction. You are now 3% less credit worthy — yet much, much richer for having no debt! I’d take that trade anyday.

    Comment by Anonymous — Jan 22nd 2010 @ 11:53 am
  14. It may still be the case that credit reports are “mortgage centric”, which is to say that your mortgage is the single most important entry on the report and in your credit score. So ***maybe*** the repositories tilted a bit when you paid it off.

    You’re correct, paying it off should have resulted in a higher score. Historically, the highest scores are among the elderly who have paid off most or all of their debt. You have to hope your score will begin climbing shortly.

    This highlights why we need to be careful using credit scores as some sort of absolute metric. Some things to think about…

    1) Credit scores are based on algorithims that don’t always behave in a rational way based on changing input

    2) Those algorithims can be tweaked and changed

    3) As proof of the above, your credit score can and will change at least every 30 days, sometimes radically.

    Credit scores should be less important than gettign out of debt. Being debt free is the real payoff anyway, you really don’t need to worry about credit scores anymore!

    Comment by Anonymous — Jan 22nd 2010 @ 12:06 pm
  15. This just proves the foolishness of the current calculation algorithm in place for FICO.

    Comment by Anonymous — Jan 22nd 2010 @ 12:18 pm
  16. Let me ponder this a minute…when you pay off your mortgage and, assumably, become completely debt free, you now have to worry about a score which affects your borrowing capability? What part about being debt-free am I missing here? By the way, I paid my mortgage off three years ago and became completely debt-free and didn’t bother checking my FICO score. This year, I purchased a new car (for cash with the money I saved from NOT paying a mortgage) and the dealer said he had to run my credit for some reason. My FICO score stood at 800. Not bad for a debt-free person! Guess I can run out and get a primo interest rate on a second mortgage! LOL….JUST KIDDING!

    Comment by Anonymous — Jan 22nd 2010 @ 12:35 pm
  17. Dave: I never said that I was worried about it. I was just pointing out how illogical the scoring process can be. The main reason I kept track of this is that I run a finance website, and I want to help people figure out how these things work.

    P.S. If I was paying cash for a car and the dealer asked to check my credit score, I wouldn’t let them.

    Comment by Nickel — Jan 22nd 2010 @ 12:47 pm
  18. Matt Jabs (15) – and the faith and credibility we place in it.

    Comment by Anonymous — Jan 22nd 2010 @ 12:54 pm
  19. Nickle, interesting post. Somehow this isn’t surprising. FICO is a perfect example of how we are encouraged to be debt slaves. I was shocked to find my FICO score was lower than friends with car payments, multiple credit card, huge school loans, ect. I thought I was being smart by having 1 credit card, no car loan, and a small school loan, but FICO didn’t think so. I was “encouraged” to open up additional credit cards to improve my score. I decline, and was still approved for a mortgage anyways. My score was still over 730, but it is such horseshit that your score goes down for paying off debt and up for incurring it.

    #3, #12 – Awesome quotes describing FICO. It’s true, this scoring system is corrupt.

    Comment by Anonymous — Jan 22nd 2010 @ 1:05 pm
  20. That’s ridiculous, and one reason why I say credit scores are worthless. What a moronic system; no wonder the banking industry is in trouble.

    Comment by Anonymous — Jan 22nd 2010 @ 1:35 pm
  21. The GOAL of every man, woman, child should be to pay off all your debt and never think of your “debt score” again. The only debt people should consider is a mortgage. Only after saving 25% down and getting a 15 year mortgage. Then put all your effort into paying that mortgage off early. Save, pay cash for things. If everyone did this we would truly change the world.

    Comment by Anonymous — Jan 22nd 2010 @ 1:51 pm
  22. While I didn’t have the pleasure of paying off the mortgage yet, I learn this too.

    For a previous post I wrote about FICO I learned they have a FICO score simulator.

    I played with several scenarios, we pay off credit cards before the billing cycle ends and thereby have a lower score than if we left a few hundred dollar on.

    With trial an error I found about a 5% debt/credit ratio provides the greatest score all other things being equal.

    Go figure?

    Comment by Anonymous — Jan 22nd 2010 @ 1:54 pm
  23. I think the biggest kick in the pants is that my insurance rates are affected by my credit scores. If it wasn’t for that, I wouldn’t care about my credit score if I didn’t have any debt, or any need to borrow.

    Comment by Anonymous — Jan 22nd 2010 @ 1:56 pm
  24. Shawn (19) – ABSOLUTELY – credit scores are tools of the credit industry! They’re designed by lenders for lenders. We’re playing fast and loose with their purpose when we act as if credit scores are trusted friends.

    It’s an attempt to subjugate our humanity to a system that wants to group and tag us by the number we bear. Then some companies are making money by selling OUR credit scores back to US! Is that contorted?

    We need to pay our bills on time, pay our debts off as we can, and stop worrying about credit scores!

    Comment by Anonymous — Jan 22nd 2010 @ 2:11 pm
  25. Way to go!

    Just think…pretty soon, your credit score will be low enough TO LEAD TO AN INCREASE IN YOUR INSURANCE PREMIUMS!!!

    What kind of messed up world is this…

    Comment by Anonymous — Jan 22nd 2010 @ 8:54 pm
  26. Yeah you no longer have a “good” mix of loans because the installment is gone. Don’t sweat it. That’s how the FICO formula has been.

    Comment by Anonymous — Jan 22nd 2010 @ 9:39 pm
  27. Isn’t your score as-is still high enough for you to qualify for the best rates?

    Comment by Anonymous — Jan 22nd 2010 @ 11:59 pm
  28. A credit score actually reflects how profitable you are to a lending institution (i.e. bank, financing company), not how creditworthy you truly are. The best credit scores are for those people, who have loans and always pay the monthly installments timely. For those people, who never take out loans or credit cards, their credit scores are actually in the basement, even though they may always pay their bills in cash or never incur a need for credit. So, a “credit score” should be more aptly named, “Bank Profit score”.

    Comment by Anonymous — Jan 23rd 2010 @ 1:45 am
  29. Nickel: You should do a Google search for: “FICO buckets”

    You probably switched buckets due to not having an outstanding real estate loan, which increased your modeled probability of default.

    Comment by Anonymous — Jan 23rd 2010 @ 10:11 am
  30. 1. With credit scores, all things are relative. Paying off a mortgage will have different impacts on someone with a 780 score and someone with a 580 score (and yes, people with 580 scores occasionally have mortgages). Someone with a high debt load might see a score increase by paying off mortgage.

    2. The higher your credit score is, the more sensitive it is to credit events. Essentially, with almost perfect credit, *any* change is going to have a large impact, especially compared to someone with a lower score. Also, a drop from 781 to 764 is essentially meaningless. Once you are in the upper 700s, you are looked on very favorably by lenders.

    3. Yes, Credit Scores were developed by lenders for the benefit of lenders. The algorithms used to develop credit scores are based on ridiculously large volumes of historical data, and, like them or not, credit scores are remarkably good at predicting credit risks. (It wasn’t the credit scores that failed and caused the housing/mortgage crisis. It was the lenders who chose to ignore the scores and give ridiculous loans to those with “subprime” credit).

    4. If you are someone who lives debt free, you run the risk of not having a *great* credit score. The two biggest factors in your credit score are how much you owe and how good you are at making your payments. Having no debt is obviously great from the “how much you owe” perspective, but if you have no payment history, a big input to the scoring model is missing, and that will hurt you.

    It’s great that you have no debt and pay cash for everything. But if you ever walk into a bank and need a loan, the bank has no way of knowing if you are someone who CHOOSES to live debt free because you are responsible or someone is FORCED to live debt free because you can’t handle debt and make payments on time. Sucks for you, but you can’t blame the lenders.

    Comment by Anonymous — Jan 23rd 2010 @ 12:27 pm
  31. But since credit reports show at least a 2-year payment history, showing no late payments, shouldn’t that indicate that you choose to live debt free? If I have credit cards in my wallet and a house paid in full, if a lender chooses to think I’m “forced” into living debt free, then I’d rather not to business with that lender anyway.

    Comment by Anonymous — Jan 24th 2010 @ 9:49 pm
  32. A slightly different perspective: I filed bankruptcy that’s not yet discharged. I have 6 derogatory accounts, some 120 days late but paid off; others included in the bankruptcy. And somehow, SOMEHOW, my credit score is still 750/759/752 across the three bureaus. Unbelievable. I have a $77K mortgage and a HELOC paid off to 50% of the credit limit, both with 100% on-time payments; and I have two credit card accounts with a limit max of $850 between the two of them that I use occasionally. I think that supports that FICO is mortgage centric. I’d give myself a 585 or something, not 750!

    Comment by Anonymous — Jan 25th 2010 @ 9:31 am
  33. If I had the opportunity to be debt free without a mortgage, I would. Screw the FICO rating. This is what the banks want. They want the public to believe that debt is necessary to be part of society. I’d keep a credit card for occasional use and take out a car loan when it came time for a new car purchase.

    I have a good credit rating but I am totally disgusted with the big banks and their attitude. Good for Mr. Obama’s plan to tax these banks that can afford to give out these big bonus’s to these executives and investment experts who were guilty of very bad decisions.

    The only good thing that has come out of this is not getting bombarded with credit card applications. I usually take all my junk mail and mail them back the non identifiable paper in their postage paid envelopes. Why should it wind up in our landfill. Keeps the postal workers employed to.

    Comment by Anonymous — Jan 29th 2010 @ 12:45 pm
  34. Ohhh… back to the good old Fico.

    3-4 years ago I payed $70+ for score-watch, now they ask $99 for it & I canceled my subscription. “The Big 3” are now “The Big 2 minus 1”. And generally speaking, I have stopped caring for it. Hit the 750 & there is my tombstone. I just have too short of a credit history, maybe in another 12-13 years. Who knows by then Fico may request something else.

    After all it is in the name “Credit” score, if you wish to live on credit that is. If you care about your credit score you shouldn’t be here, I think. My view is “make & save money” so you don’t have to depend on credit. Power of money is in their availability at the present moment. “Cash is king” not “credit is king”. I think someone misplaced the whole point and set a fake one. I don’t need credit… I NEED MONEY. I don’t understand American Economists & politicians… they make no sense.

    Comment by Anonymous — Feb 6th 2010 @ 12:55 am
  35. We paid off our mortgage about 4 years ago and just got an updated credit score. My husband’s score is now it the fair range due in part (according to the report) to not managing mortgage loans effectively! Mine is still in the good range due to the fact that over the past 5 years or so I have opened (and closed) several store cards to get the free financing deals on some items we have bought. We have 2 credit cards that we pay off every month, no car loans, and no late payments.
    The credit report said to improve our score we need to open a mortgage or car loan. This is maddening I feel like our new goal should be to get the lowest FICO score possible.

    Comment by Anonymous — Feb 17th 2010 @ 9:41 am
  36. My credit union provides an updated score for free that is updated every 3 months when I log into my account online. Over the past several years I have had NO changes to any loans. The only thing I have is a mortgage (been on auto payments since day 1) and 1 credit cards which I pay off in full each month. 3 months ago it was 834 and now it is 815, with absolutely no changes in credit use. 9 months ago it was as low as 792.

    It seems each time I check it, the thing goes up or down by as much as 20-30 points. I asked my banker about this and he said its common. Crazy system if you ask me. I am getting ready to pay off my mortgage soon so I suppose it may take another drop. But at this point I won’t care as I don’t ever plan to take out another loan as long as I live (except for the credit card I use only for convenience)

    Comment by Anonymous — Feb 21st 2010 @ 2:08 am
  37. Most people think FICO stands for Fair Isacc, but maybe its For Idiots Considering Outstanding debt.
    Yes, it’s absolutely a bank profitability score and we should be embarrassed to have a high score based on owing numerous debts…strive for that mortgage only! Pay CASH! Pay cash does NOT mean pay off a credit card balance each month..that still leads to more spending than just using cash.

    Comment by Anonymous — Mar 4th 2010 @ 4:26 am
  38. with condos and houses in america depreciating to 25-50k$ in many areas of the country, the need for a fico score will be a thing of the past. Any high-school dropout could well afford to buy his own shack in a couple of years of living with parents while flipping burgers at wendy’s and doing odd jobs on the side. If there’s a silver lining to the credit crash and housing bubble, it is the unbelievably affordable houses nowadays. Anyone making minimum wage in america could afford to buy a modest property and pay cash for it just after two years of penny-pinching. A ‘roof above one’s head’, like food and water, is vital to a human being’s existence(aside from being vital to one’s self-respect), and for many years not many a regular joe could pay up for it in cash and literally enslaved most regular joe’s with monthly mortgages. So the housing crash has probably done many people good(they just haven’t realized it). It is almost a crime to charge people interest for buying something as basic as a house(unless, of course, the house being bought is WAY beyond basic). I’d say it is more appropriate to impose extremely high taxes on coca-cola, marlboro, and bud light and use the proceeds to help each joe or jane to buy one property without having to pay mortgage interest. A modest house is necessary for a person’s survival and dignity, whereas sodas, cigarettes and liquor are not. An oversupply of houses, like an oversupply of food and water, is a good thing because it equates to affordability. I digress.
    and yes, FICO scores lure people into the debt trap. Funny that the people with the good fico scores are those who may never even need it.

    Comment by Anonymous — Jun 8th 2010 @ 7:02 pm
  39. I paid off my mortgage and got a 10pt drop. I inquired about refinancing first and got a 31pt drop. Yikes! Down to 731. F**k ’em, it’s all cash from now on.

    The FICO is obviously not a consumer feel-good tool. It is a business tool, designed to protect the subscriber businesses. It really only cares about one thing: can a person assume a debt and make regular payments? In this regard, showing that you are in the middle of a series of on-time payments is more inmportant that what you did two years ago. When the score drops, you are not being punished. You are simply no longer being rewarded. Being debt-free, in it’s narrow logic, is not necessarily a good indicator that you can handle installment debt. I agree that loans successfully paid off should be given more consideration…

    Comment by Anonymous — Sep 8th 2010 @ 9:20 pm
  40. Great to see this issue discussed somewhere. (It wasn’t easy to find; all searches brought up mortgage charlatans!) “FICO is a perfect example of how we are encouraged to be debt slaves.” said a previous contributor. True that! I paid off my mortgage and took a substantial hit to my FICO score. Worse, my neighbors who leveraged to the hilt with HELOCs etc get mortgage bailouts now. More punishment if you work hard and are financially responsible.

    Comment by Anonymous — Feb 4th 2011 @ 8:40 pm
  41. I was hoping that my mortgage payoff would help my credit score recover after a Chapter 7 bankruptcy. However, the mortgage bank refuses to report my payment history or the payoff to credit bureaus.
    Where is the “fairness” and the “accuracy” in the credit reporting?

    Gotta love the first comment here posted by Budgets are the New Black!

    Comment by Anonymous — Feb 9th 2011 @ 9:07 pm
  42. My score was 715. It’s not perfect, and it’s not horrible either. I have the same BEFORE/AFTER position. Paid off my mortgage,… drumroll! and it dropped 65 points! to 650!. Now, this is frustrating. Of course, I have no need to go out applying for credit, but, is this how we got into the financial crisis? How am I a worse credit risk after paying off my house? How is someone with a mortgage to maintain (less free cash) a better risk?
    I looked up the FICO Leadership, and the CEO, and he is a former IBM’r from finance and one Senior VP is a former Federal Reserve member.
    I think my grandson (8) knows more about finance and who he is willing to lend to than these bozo’s!

    Comment by Anonymous — Feb 11th 2011 @ 8:37 pm
  43. My score dropped whopping 130 points from 990 to 760 after paying off my mortgage and car loan. It really doesn’t matter that you paid all your mortgage on time, etc. The data is there but the system just doesn’t like people with no debt. They want people with money in the savings account for 0.5% interest, paying 20% on the credit card debts. I would rate those to be the best customers as well.

    We think we are the best customers but we routinely sign up with 0% interest credit card and deposit the cash advance for the 0.5% interest. The banks hate us.

    Comment by Anonymous — May 10th 2011 @ 9:39 am
  44. I bought a house and took out a 30 year fixed rate mortgage. I paid off the mortgage in 3 YEARS instead of 30 and saved myself almost $200,000 in interest. My credit score dropped 62 points!!!! WTF! The banks want idiots to keep themselves in debt. Good debt my a$$. 62 points, WTF!!!

    Comment by Anonymous — Jun 22nd 2011 @ 2:01 am
  45. Very interesting stuff … so if I pay off my mortgage but then open a HELOC that I don’t plan to use, will it prevent that drop in FICO score? Then I’d have the same credit available to me rather than losing that unused debt capacity in my mortgage when I pay it off.

    Comment by Anonymous — Jun 27th 2011 @ 8:33 pm
  46. long time reader (big fan), first time commenter….

    Great topic. This is the type of question that can never be found in financial books. A follow up question is how quickly your FICO score rebounded? I ask because we are a year away from paying off our mortgage on our condo. Although we have the funds to pay it off, we will be looking into upgrading to a slightly larger home (just had baby #2). We are fortunate that we will not have to sell our current home since we have a sizable down payment for the new home and plan on renting out the condo. So obviously, maintaining our excellent FICO scores is important for securing another mortgage. We’re somewhat flexible in our move date (within a year or so from now), so I wonder if it would be worthwhile to just pay off the remaining 27k at this point. If I knew that the FICO rebounded in a few months, then I would most likely just pay it off. But if it took more time, then I would wait. Any thoughts?

    Comment by Anonymous — Aug 6th 2011 @ 7:56 pm
  47. FICO calcs prefer a mix of loan types. Remove one that was previously in good standing and it will probably hurt your score. There is no “rebound”. You are not being penalized, yuu simply don’t get additional points anymore for the imstallment loan. A person’t default FICO score isn’t 850 from which you start losing points. It works the other way, you get points for good stuff and you have some of those points removed for bad stuff or lack of good stuff. Paying off a home (which I did and promptly lost 10 points) will definitely be looked at favorably by a potential lender but as far as your score goes, it’s, “Great, but what have you done for me lately?”.

    Remember, the FICO score isn’t there to help you. It is there to protect lenders so it is definitely biased in their favor. That is why it rememebers bad stuff for years but doesn’t give a crap if you paid off a home last month.

    Comment by Anonymous — Aug 7th 2011 @ 10:56 am
  48. to newbie,

    It won’t rebound, it will continue to get worse until you get a better credit mix (mortgage, car loan, and credit cards.) Ours didn’t go down too fast at first but the longer you go without all the types of loans the worse for you credit score. I imagine as the years go on and the mortgage and car loans drop entirely off our credit history then we will really take a hit.

    Comment by Anonymous — Aug 10th 2011 @ 6:35 pm
  49. I sold one of my two houses (sounds wonderful that I could have two houses but it isn’t)and because of that my credit score went down and my homeowner’s insurance on the second house (which I live in) went up $400 a year because of the drop in score. Why do I have to accept this? It’s ridiculous! (The house I sold was my childhood home left to me when my mom died and it was 70+ years old and just about falling down whereas the house I am in now is only 8 years old!) I have no job and no retirement income, just Social Security. Geeezzzzzzzzzzz!

    Comment by Anonymous — Dec 19th 2011 @ 1:31 pm
  50. I just don’t undestand why a credit score would drop when you pay off your mortage. We ony owe just over $300, which will be taken out of out escrow. What gets me even more you have to pay fees to pay the mortage off. We’ve never been late and yet we paid more on the mortage in interset. Nothing we can do about the fees, but we will be buying foreclosurs as an investment. We’re in our 50’s and God willing we will be here awhile. God help our children and g-kids. As I see it know the economy sucks. Just pray it’s gets better.

    Comment by Anonymous — Dec 28th 2011 @ 5:03 pm
  51. Yeah, this happened to us too – we paid off our mortgage when we sold our house – lived with relatives for a few months while we tried to build some savings back (since the home sale was a bit of a loss), and now when we are applying for a new home loan, we find out that our credit dropped from 791 to 786 (all other aspects of the report were identical, even better in terms of low revolving balances, etc.).

    You’d think this rate drop isn’t a big deal, but I guess there are some rates where the cutoff is 790. So, through no fault of our own other than being fiscally prudent, we get a lousier rate. No wonder the system is broken. No common sense.

    Comment by Anonymous — Feb 13th 2012 @ 7:53 pm
  52. It goes down because the bank no longer gets the 1.9 million dollars (average) from you if you make payments all thirty years.

    Comment by Anonymous — Mar 7th 2012 @ 5:01 pm
  53. Actually, in my experience, credit scores are generally higher for people who pay off their mortgages! Sameer’s score only dropped by five points, but that’s because a) his score is close to perfect already, and b) all score bounce, often without apparent reason.

    Comment by Anonymous — Mar 7th 2012 @ 5:25 pm
  54. The differing effects from paying off one’s mortgage illustrate the complexity of the FICO calculations. Mine dropped 10 points the month afterwards with no other changes to my credit universe. I believe that any change to a person’s total available credit, overall indebtedness, payment patterns, and/or credit mix is going to affect the calculations. The direction and magnitude of the score change depends not just on the specific events themselves but on the new, overall credit picture they help to paint. The scoring and weighting system FICO uses for the many pieces of the puzzle is no doubt arcane and a closely guarded trade secret.

    Comment by Anonymous — Mar 7th 2012 @ 6:37 pm
  55. It has really been an eye opener to me as to how big of a joke the credit reporting system is.
    A consumer has to be in debt to have a decent number.
    You can be punished for closing an account that has been in good standing for years.
    Shopping for interest rates most banks pull a report, That also can impact your score.
    No one at Equafax has a clue how the system works.
    Even getting an insurance quote can be negative.
    Some one needs to be held responsible for fair credit reporting. But who might that be?

    Comment by Anonymous — Apr 9th 2012 @ 5:42 pm
  56. Your score went down after closing your mortgage because you had “less available credit,” and also because you paid off the loan early. If you take out a loan of any duration and pay it off early it will hurt your score. How many months did it take for your score to return to normal?

    It makes me wonder, if you bought a house under a mortgage with the intention of renovating and selling it a few months later, how much would that hurt your score and how quickly would it return? People who flip houses must use personal assets or hard money lenders for this sort of thing, because taking out a mortgage on a property you flip 4 months later, and then doing it again would only keep driving your score down to the point that you couldn’t get a loan. What a stupid system.

    Comment by Anonymous — Sep 25th 2012 @ 5:32 pm
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    A lot of times it’s hard to get that “perfect balance” between superb usability and visual appeal. I must say you have done a very good job with this. Also, the blog loads extremely fast for me on Firefox. Superb Blog!

    Comment by Anonymous — Apr 23rd 2013 @ 11:59 am
  58. There are two unfortunate truths here.

    One is that as far as the credit report, over the years there has been a shift from it retaining what looked good and shedding anything bad after 3 years. Now regardless of what you do good or bad, the clock starts at 7 years at the day of last activity, so it all good or bad is no more after 7 years. Well that is the way it is supposed to work, except reporting agencies now allow “re-aging” where they allow the creditors to reset the dates or the buyers of bad debt to make a brand new entry to your credit. I know this after being a victim of fraud.

    As far as FICO is concerned and lenders are concerned, it’s stacked against you always. They will beg a person with no job and a 0 FICO score to take a credit card even at 18 years old… in hopes they will use it to ruin themselves early and stay behind the curve for a long time thereafter.

    The FICO is just a good excuse lenders can use to charge you more interest despite how diligent you are with your responsibilities.

    I know this because I established myself very well at a young age and soon became financially independent. I realized the pressures of credit were so high that I made additional changes. I waged war against it and got completely out of debt aside from a mortgage I had on a rental property to keep some active credit. I no longer needed or used credit period.

    Many years later life would knock me down. I got behind the curve and ended up in a situation where I needed a new vehicle and no longer had the cash on hand to just right a check. Imagine my shock (not having a clue) when I was told at 37 years of age my credit score was 515! Me, guy who never made a late payment and paid everything off early! Partly because I had a couple of aged fraudulent loans for small amounts. But mostly because I only had the one mortgage on the rental property and no other types of credit.

    For the last 3 years I have done everything you are supposed to do to increase your credit score. I’ve opened a car loan and paid on time. I have opened credit cards and paid them off monthly on time. And I have maintained the mortgage, paying it on time. And I have worked diligently to have the fraudulent items removed.

    My credit score has went nowhere really that matters. It went up to 637 at one point. Then once the bad accounts were removed it actually plummeted.

    Me the model guy who should have the perfect credit score, has a score of 573 even after 3 years of kissing butt to try to improve it.

    ….and I found myself here tonight because my 30 year mortgage is going to pay off in 20, and I have been debating writing the check to pay it off NOW… but I am concerned about the effect on my FICO. I’d like to buy another vehicle and another house soon. But I already can’t do that and paying off early may hurt my FICO to the point I can’t ever get it back up high enough. If I pay off now, I only have 7 more years to try to improve it without an open mortgage account before it completely disappears. It has only went up 58 points in 3 years! How far will it fall from 573?

    This is an algorithm some of us may never be able to beat (by design)

    Comment by Anonymous — Mar 2nd 2015 @ 3:39 am
  59. Joinging in the convo late. But it is STILL the same for paying off your mortgage and haining a HUGE hit on your credit score. I lost over 45 points on all scores by paying off my mortgage early, in addition to paying their “filing fees” that took them over two months to report as a released lien with my city. It is just insane. Not to mention the joke of Wells Fargo and now putting me on their “lets throw additional junk mail at them” list.

    Comment by Anonymous — Jul 28th 2015 @ 2:21 pm

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