When I achieved a perfect 850 FICO score, I thought I had reached the ultimate level of credit usage. However, my score dropped 24 points to 826 after paying off my mortgage. This decline is not unusual for consumers in the FICO top tier, and many people have expressed their concern about losing points after paying off loans. But there’s no need to worry if the decline doesn’t push you into a lower credit tier.
I want to assure consumers that a score decrease after paying off a mortgage or auto loan should not significantly impact your ability to get the best loan terms or insurance rates. In my own experience, I first achieved a perfect 850 credit score in 2018. I maintained this score for several years, except for a temporary dip when I applied for new credit. However, paying off my mortgage caused my score to drop.
To understand why this happens, it’s important to know how the credit-scoring algorithm works. The most widely used credit score is FICO, which ranges from 300 to 850. Your score is based on information from your credit reports, which may vary depending on the credit file that is pulled. Factors such as payment history, amounts owed, new credit, length of credit history, and credit mix contribute to your score.
The payment history has the highest weight at 35%, followed by amounts owed at 30%. The length of credit history comprises 15% of your score, while new credit accounts for 10%. The remaining 10% is based on your credit mix, which includes installment loans like mortgages and auto loans, as well as revolving accounts like credit cards.
Mortgages impact several categories in credit scoring, including length of credit history, credit mix calculations, and payment history. Paying down a mortgage can positively affect your score, particularly if you have been making on-time payments. However, when you pay off an installment loan like a mortgage, it is no longer included in the credit mix category. This could result in a temporary dip in your FICO score.
The good news is that your score should rebound over time as long as you continue to demonstrate responsible credit behaviors. Making on-time payments and keeping your overall debt manageable are the best ways to boost your score. Furthermore, it’s worth mentioning that even after paying off an installment loan, it continues to positively impact the length of credit history.
It’s worth noting that achieving a perfect 850 score is not necessary to be considered an exceptional borrower. Lenders do not require a perfect credit score to provide favorable credit terms. In fact, only 1.7% of scorable U.S. consumers have an 850 score. Most lenders have different tiers based on credit scores, with the best terms reserved for those in the highest tier.
Since paying off my mortgage, my FICO credit scores have been rising, currently standing at 846 and 841 using different scoring models. As someone who has experienced this score decline firsthand, I can confidently say that it’s nothing to worry about as long as you consistently exhibit positive credit behaviors.
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
