Credit score drops as I'm paying down--why?

Credit score drops as I'm paying down--why?
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#1

FICO dropped 10 points in a week, even though original score had been based on a higher CC balance, higher mortgage balance and higher student loan balance–higher everything, really. Since last reporting period, CC balance down $1300, student loan down $2000 (will be paid off next month) and mortgage down $1200. Utilization ratio dropped from about 22% to 19%. Credit score was just over line for excellent; a week later, it’s a couple of points below–WHY??


#2

Welcome to the community @MLS - great to have you here! :wave:

It can definitely be jarring when scores change and you don’t see why - especially, as in your case, it drops you out of that coveted ‘excellent’ range!
It sounds like you’ve made some very positive changes of late in the factors that have the most impact on your score (credit utilization, on-time payments.) Some score factors are not as ‘visible’ — like an account aging off your report, or a scoring model adjusting its recipe.

Be sure to check your report carefully for any errors, but based on what you’ve described, I’d bet you’ll see your score bounce back in the near future.


#3

Hi, @MLS! Credit scores can be confusing, but we may be able to figure out what’s happening to yours. First of all, I want to double check that the “before” and “after” are actually the same type of score from the same source. Sometimes people look at a score on one site and compare it to a different one from another source, not realizing the formulas/data are different, so the numbers will be different but not because they went up or down. It’s more like comparing prices at different gas stations, if that makes sense. Just because gas is 10 cents cheaper at Arco doesn’t mean gas prices overall changed.

You may already know this. The reason I went into that whole spiel is that you mentioned FICO, which is not the score NerdWallet provides (we offer a VantageScore 3.0 from TransUnion). If one of your FICO scores did drop, and you’re sure it’s the same version from the same credit bureau, then you may want to pull your credit report from that bureau to see if there’s any information on there that might be causing the change. Ten points is probably too small a change to indicate identity theft and too big a change to indicate an inquiry, but there may be another account on there with a slightly higher balance or something could have disappeared from your report, such as the old account falling off that @Cori mentioned.

Also, it may help to know that different lenders have different ideas of what constitutes “good” or “excellent” scores…they don’t all use the same cutoffs. And one of the givens about credit scores is that they’re always changing, so if you keep up the good habits, yours are sure to bounce back.


#4

Thanks, @Cori and @lweston, I appreciate the responses. The score in both cases was a FICO8 from Experian. I still have to check my report, but based on your suggestions, I’ve been thinking about it and I’m wondering if the culprit could be the closing of two student loans? I had three accounts active and paid off two loans entirely and at once, leaving just one left. I saw that the lender reported the paid accounts as “closed.”
In any case, I’ll continue to hammer away at the utilization. But Is this something you can explain about to a lender—is it worth bringing up when shopping for auto rates?


#5

That very well could be what happened, @MLS, given the relatively small size of the drop. It’s a little frustrating that you should get hurt by paying off loans, but the damage is relatively small and likely pretty short-lived.

A lot of lending is automated, so there often isn’t a way to explain anything. A better approach is to line up financing in advance, perhaps from a credit union. You’re likely to get the best rate and terms with a CU. Then the dealership is in the position of having to beat what you’ve got, rather than giving you a song and dance about how they would give you a better deal but they just can’t.

Here are some other super-helpful info about car shopping from our own Phil Reed:

Let us know what kind of car you get!