Credit score goes down substantially after paying off student loan

Question

My credit score was about 800, according to my bank, which gives it to me for free on their website. I still had several years on my student loan, but I paid it off a few months ago. A couple of weeks ago my bank shows my credit score is down about 50 points from what it was. Nothing else, as far as I know, has changed in my credit history (I get notifications in email when something changes in my credit).

Is this normal?

Answer 1

Assuming nothing else changed, there's a few possibilities.

As @binarymax mentions, your credit utilization ratio may have dropped. You mention in the comments that you have zero debt, but if you have any credit cards the ratio is typically calculated from the statement balance, I believe. I've noticed my FICO can fluctuate because of that, even though I pay off all my cards in full every month. Of course, if you have no other accounts, you'd have a 0/0 utilization. I don't know how the Bureaus handle that, but 0/0 =/= 0...

Second possibility is the number of accounts. If you have vary few accounts, dropping one may be enough to significantly impact this portion of the score (though it's a small portion IIRC..)

Thirdly (and IMO most likely), dropping the student loans probably dropped the average age of your accounts. I would expect that for many people with student loans, they are one of their oldest credit accounts, if not the oldest. Age of accounts is a pretty significant factor in the FICO calculation, and it's quite possible that it just dropped by a couple of years.

Answer 2

There is not much information provided, as your FICO score is a complex algorithm with many variables.

However, This may be due to your debt/credit ratio. For example, if you had an original student loan of $10,000 and one credit card limit of $2,000, with $1000 owed to your student loan and $500 owed to your credit card, then your ratio is: ($1000+$500)/($10000+$2000)=0.125

If you pay the student loan and it is closed, you now have a ratio of: $500/$2000=0.25

Having this higher ratio may have accounted for the drop in score.

Answer 3

Student loans are term loans which, if you have always paid them on time, help your credit score in the following ways:

1. The loan increases your total number of active accounts that have a perfect on-time payment history.
2. The loan increases your credit "mix". This matters more if the student loan is your only term loan.
3. If the student loan happens to be your oldest credit account, then this is another specific positive factor for AAoA (average age of accounts).

When the loan is paid off, you lose the above advantages, and so your credit score could very well drop. But don't fret, the drop in the credit score is inconsequential in comparison to the fact that you don't have student loans anymore, and in your case, are also debt free. Well done.

Answer 4

http://www.fico.com/independent/?CID=70180000001TxKr&utm_medium=Scores_Independent&utm_campaign=FY18_Q1_NorAM_Homepage_Banner_Scores_Independent&utm_source=Homepage_Banner

"FICO has built analytic models for multiple markets that consider alternative data, such as bill payment and non-financial data (like mobile device and retail purchase information)"

It appears, many variables go into a FICO score. So, lets say you pay off your student loan, but cut back on spending - or moved to a different neighborhood, sold your car...your behavior will affect your FICO score.

Good question!

Answer 5

I note that you say you have zero debt. While I have never seen a true FICO score often enough to test it I have seen multiple alternative scores that can jump back and forth a fair amount (although not 50 points) based on whether my utilization that month was 0% or 1%. This was entirely from what I charged that month, I'm not carrying any debt. In reality this was .9% or 1.1%, the calculation was obviously truncating any decimals and would ding my score if that month dropped below 1.000%.

Answer 6

FICO scores are based on an algorithm that takes several factors into consideration. Average age of accounts, credit mix (or the different types of credit you have), payment history (ever late/defaulted), utilization (generally only considers unsecured revolving debt, like a credit card), number of accounts, and other factors. By paying off your student loan and becoming debt free, a few things likely happened to your score, with various impacts:

• You paid off your last term loan, which reduces your credit mix (you no longer have any term loans, being debt free).
• You closed an account by paying down the loan, which will reduce your number of accounts (and potentially your average account age, though your comment suggests the loans only existed for 3 years, so this account age was probably a positive shift).
• You said you let a credit balance ride at a larger than usual amount, if this pushed your utilization (amount used vs. amount offered) over a certain threshold, it will reduce your score (from what I understand, 7% or less is ideal, 30% or more is considered bad).

All in all, I would expect your score to drop. That being said, it does not matter whatsoever where your credit score lies unless you plan on acquiring new debt. If you're not applying for financing or doing anything else that requires a credit check, your credit score does not matter. You should monitor your score for fraud/abnormal activity, but beyond that, ignore its natural fluctuations until you need to open a new line of credit for something.

Answer 7

The credit score is a metric of behavior model that represents only the likelihood that a lender will make a profit by doing business with you.

When you paid off your student loan, you are no longer making payments. The bank has stopped profiting from you, so the credit score drops.