# Any negative consequences to paying off debt early? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [September 23, 2012, 4:08pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599 "2012-09-23T16:08:45Z")\ **Posts on this page:** 6\ **Page:** 3
**Author:** ![eclectic\_wench](https://avatars.discourse-cdn.com/v4/letter/e/ac91a4/32.png) [@eclectic\_wench](https://boards.straightdope.com/u/eclectic_wench)\ **Post date:** [September 25, 2012, 12:28pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599/41 "2012-09-25T12:28:47Z")
> [@pulykamell](#): > > Like I said, that seems really unusual and does not jibe with my experience with folks who have credit cards and pay them off in full and on time. _shrug_ I guess it doesn’t make a difference to you right now, but I would have pulled my credit report to make sure there isn’t something wrong with it. I mean, maybe if you have like $300 in revolving credit or something, your score may be a bit low, but if you have several thousand dollars of revolving credit and low utilization, I can’t see why you’d be getting a score of 650. I can think of three people off the top of my head who pay off their balances (at least so far as they have told me) and they all have scores of over 800. I’ve had the same experience as Mach Tuck. When we started trying to get a mortgage, I’d had a credit card with a several-grand limit for over ten years, since college, and had always paid off the full amount (usually a few hundred quid) every month. My husband had never had a credit card. Neither of us had ever had any other debt - no loans, no overdraft, no overdrawn account, nothing. In other words, we are excellent at living within our means. We thought this would make us a really good risk for a loan. We were told our credit rating wasn’t great. We asked if there was anything bad in there, and the bank said no, it was just that we’d never borrowed money. That’s when I started wondering if they might be more interested in our viability as a source of interest, rather than our reliability. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [September 25, 2012, 12:57pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599/42 "2012-09-25T12:57:33Z")
> [@eclectic\_wench](#): > > I’ve had the same experience as Mach Tuck. When we started trying to get a mortgage, I’d had a credit card with a several-grand limit for over ten years, since college, and had always paid off the full amount (usually a few hundred quid) every month. My husband had never had a credit card. Neither of us had ever had any other debt - no loans, no overdraft, no overdrawn account, nothing. > > In other words, we are excellent at living within our means. We thought this would make us a really good risk for a loan. > > We were told our credit rating wasn’t great. We asked if there was anything bad in there, and the bank said no, it was just that we’d never borrowed money. That’s when I started wondering if they might be more interested in our viability as a source of interest, rather than our reliability. Ah well, maybe that the problem. You guys had a rather low credit limit card, and only one of them, and never used much of it. ---
**Author:** ![Machine\_Elf](https://avatars.discourse-cdn.com/v4/letter/m/82dd89/32.png) [@Machine\_Elf](https://boards.straightdope.com/u/Machine_Elf)\ **Post date:** [September 25, 2012, 1:39pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599/43 "2012-09-25T13:39:37Z")
> [@Mach Tuck](#): > > Is anyone seriously defending the credit score system as “Good”, or just an expedient that we’ve ended up with and it is what it is? I say it’s failed people like me who are honest and pay their debts in good faith. It also fails the lenders because this makes me even less likely to undertake borrowing. Your use of the term “expedient” implies that there is a better, more accurate method for assessing credit risk, and that this better method is not being used because it’s more work, or that this better method somehow fails to serve the interests of one or more involved parties. My contention is that despite its inability to gauge credit risk among people who have no history of borrowing money, the present system (in which only people who have recently borrowed money and paid it back on time are judged to be a good credit risk) really is the only reasonable method we’ve got. > [@eclectic wrench](#): > > In other words, we are excellent at living within our means. We thought this would make us a really good risk for a loan. > > We were told our credit rating wasn’t great. We asked if there was anything bad in there, and the bank said no, it was just that we’d never borrowed money. That’s when I started wondering if they might be more interested in our viability as a source of interest, rather than our reliability. You were looking for a mortgage. There is a [loan origination fee,](http://en.wikipedia.org/wiki/Origination_fee) anywhere from 0.5-2%, that the lender collects when they first give you the mortgage; that’s separate from any interest they collect over the life of the mortgage. If you pay the mortgage back rapidly, they don’t collect very many dollars of interest. However, if you amortize that origination fee over the life of the loan, and the life of the loan isn’t very long, then it can be comparable to an extremely high interest rate. Example: suppose you get a mortgage with a rate of 4%. You pay an origination fee of 1%. A month later, your crazy Uncle Willie says he’ll pay off your mortgage, and you can pay him back interest-free at a later date. You do the deal, and so your original mortgage lender has earned just 0.333% total interest (4% per year for one month). However, the origination fee of 1% for a loan lasting one month is equivalent to an annual interest rate of 12%. Congratulations, you’ve just made your bank very, very happy. They can now take all the money you paid them back, and turn around and immediately lend it to someone else - hoping that that next customer will pay it back just as quickly as you did. **Mortgage lenders come out ahead when you pay them back ahead of schedule.** Even with car loans (which I don’t think have origination fees, at least not any paid by the borrower), I don’t think the lender cares if you pay it back quickly; they’ll just take the principal and lend it out to someone else right away. Unlike mortage lenders, car loan lenders don’t come out ahead when you pay the loan back early, but they aren’t getting screwed either. As I described upthread, I cycle thousands of dollars per month through my credit cards. The banks do not collect any interest from me, and yet my credit rating is stellar. Why do you suppose that is? ---
**Author:** ![Mama\_Zappa](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)\ **Post date:** [September 25, 2012, 1:50pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599/44 "2012-09-25T13:50:14Z")
> [@Mach Tuck](#): > > If true, that creates a really insidious incentive: to keep people perpetually taking on debt. If you do as I do - pay your bills on time and only take on debt that is absolutely necessary - you have a harder time obtaining credit when you need it. But if you frequently take on debt, for good or for bad, this in itself would seem to be better for your credit. > > Sounds to me like an industry that desperately wants people to keep borrowing, no matter what. Then they don’t fully explain how the formula is calculated, and actively work against providing the information to the consumer. > > Have I summed this up appropriately, or are there good reasons for things working this way? Others have commented on why the scoring shows that some people are decent credit risks, but I believe (as you do) that there are a lot of people like you who do NOT borrow, but would be good risks. The thing is, FICO and other scoring models are automated - and therefore fairly stupid in their own way. They take known numbers about a borrower, chew 'em up a bit, and spit out a number that reflects its inputs. That number shows what you’ve done with credit in recent years. For people whose history reflects enough inputs to the equation, the results are (I presume) acceptably on-target as far as reflecting how you’re likely to behave in the future. But this does not cover people who would be good risks for other reasons but don’t have the input. FICO doesn’t take into account the fact that you’ve never been so much as a day late on your electric bill, you have a house and saved and paid it off 10 years early, you have a stable job, that you’ve got 2 years’ living expenses in your savings account, that you’ve got 3 million dollars in IRAs and 401(k)s, etc. Many lenders _will_ look at stuff like that - but it’s more work for them than simply punching your SSN into a scoring tool and getting a score. Some interesting stuff on alternate credit reporting [here](http://www.theshriverbrief.org/tags/credit-reporting/). Getting back to mainstream FICO etc.: Even if you had a credit card, used it and paid it off in full every month - resulting in a clean report from that lender, one of the things the scoring model looks at is the _mix_ of credit. So someone with the same credit card profile, but with a couple of car loans that were being kept current, might have a higher score. As far as being encouraged to take on debt: Yes and no. The mix of types of credit does matter, but simply having a card that you pay in full every month, without incurring any interest charges, will still be better than nothing. All this is why, if the OP does take the family member up on the offer, I _strongly_ encourage the OP to keep at least one account open, use it occasionally, and keep it paid off (that also goes into account age, which is another factor in the scoring models). ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [September 25, 2012, 2:12pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599/45 "2012-09-25T14:12:51Z")
> [@Mama\_Zappa](#): > > All this is why, if the OP does take the family member up on the offer, I _strongly_ encourage the OP to keep at least one account open, use it occasionally, and keep it paid off (that also goes into account age, which is another factor in the scoring models). Yes, absolutely keep at least one credit card account open, and make sure it’s your oldest credit card. > [@](#): > > As far as being encouraged to take on debt: Yes and no. The mix of types of credit does matter, but simply having a card that you pay in full every month, without incurring any interest charges, will still be better than nothing. I’m sure it does matter, but you can get into the 800s with credit cards only. Two of the three 800-scorers I know (not counting myself) never had car loans or mortgages or anything but credit card debt. ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [September 25, 2012, 9:19pm UTC](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599/46 "2012-09-25T21:19:08Z")
> [@pulykamell](#): > > Yes, absolutely keep at least one credit card account open, and make sure it’s your oldest credit card. > > I’m sure it does matter, but you can get into the 800s with credit cards only. Two of the three 800-scorers I know (not counting myself) never had car loans or mortgages or anything but credit card debt. Keep in mind that part of your score is simply time based. People in the 800s are the same as people in the 700s but have had their credit longer. When my wife and I moved to the US we had a score of zero. A woman on the phone told us to get a store credit card, put $10 on it, and not pay it–that what we’d at least have a score of 350 like other people that don’t pay their credit card bills. The size of the card will also impact your score. Having a limit of $2k makes you less of a risk than $10k, because there is the potential to take on more debt. But then the amount percentage wise on the card will also impact your score. Having $1500 on a $2000 limit card is worse than having $1500 on a $5000 card. This was another one of the weird problems my wife and I ran in to. We were only allowed a card with a limit of $1000. We had no problem paying it off each month, but during the month we were also pretty close to the limit. [Previous page](https://boards.straightdope.com/t/any-negative-consequences-to-paying-off-debt-early/635599.md?page=2)