Pay Dirt is Slate’s money advice column. Have a question? Send it to Kristin and Ilyce here. (It’s anonymous!)
Dear Pay Dirt,
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.
Meanwhile, my husband’s score only dropped two points (still in the 800s). He has two credit cards (both through banks) which we predominantly use for bills and groceries (we have a joint savings account where we deposit our paychecks for expenses and use his cards for tracking). Again, we pay each in full each period.
I am confused and frustrated as to why my score has dropped so significantly even though I have practiced very good spending practices. We want to buy a home in a few years (we rent currently). How can I get my FICO score back in the 800s without accumulating more debt or credit cards? Why am I being punished for not having debt? Why was my husband’s score not hit?
—FICO Frustration
Dear FICO frustration,
You’re right to be frustrated. The problem is, counterintuitively, good money habits can sometimes hurt your credit score.
According to FICO, 15 percent of your score depends on the length of your credit history, which includes how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts; how long specific credit accounts have been established; and how long it’s been since you used certain accounts. When you paid off your car, the credit account was also presumably closed. So if you had this car loan for a while, there’s a good chance it shortened the length of your credit history, which would explain the hit. Lenders want to see a long history of solid credit.
But it’s not just history that matters. Paying off an installment loan can affect two other parts of your score: your credit mix and the “amounts owed” category. FICO actually rewards you for having an active installment loan with a low balance, because it shows you can manage different types of credit responsibly. When you paid that off completely, you probably lostthat positive factor—which can cause a temporary dip, even though paying off the loan was the right financial move.
All of this would definitely cause your score to drop. Your husband might have taken a smaller hit because he has older accounts or he has more lines of credit open. Does all of it mean you shouldn’t have paid off your car? Of course not—you made a smart financial move. But again, good money habits aren’t always good for your credit score (and vice versa). The good news is, the hit is usually short-lived if you already had good credit. If you’re worried about it because you’re planning to buy a home in the next few years, there are some “hacks” that can help boost your score—like calling your existing credit card company and asking for a limit increase. Mostly, you want to just keep doing what you’re doing—avoid debt, and pay off all of your credit cards on time. Your credit should recover soon.
—Kristin
More Money Advice From Slate
My husband grew up poor in a single-parent household. I grew up better off, with both parents making six figures. My parents were both good at saving, and good at investing money wisely. My husband knows we were better off (multiple trips to Disney World, all the fancy ‘80s toys, a large house with two spare rooms), but I don’t think he realizes just how well off. I’m just wondering if I should prepare him in some way for when my mom passes away, or go the “Surprise! We get a third of a multi-million dollar estate” route. Should I surprise him?
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