3 months ago my credit score was 775 and that included an 3 year old auto loan balance of 27k on my truck.
2 months ago I payed off the truck in full ending the loan which raised my credit score a mere 2 points to 777.
A little more than a month ago, I decided I needed a new high end zero turn lawn mower for my acreage and took advantage of a local Ag dealers 0 percent for 48 months and zero down promotion to get a 13k mower.
However once that finance hit my credit report it dropped me a staggering 37 points! My first reaction was that maybe there was something else. I watch my credit like a hawk and ran a full report that showed nothing extra.
5% credit card utilization actually went down to 4%
Zero late pays
Overall debt to income actually went down to 21% as well since the truck loan of 27k came off and I only added 13k.
Add to this that the new 13k is zero percent interest while the truck loan was at 4.99% and I am baffled.
Perhaps the fact that the “new” account hurts my “average age of accounts” has some merit, but the closed truck loan was only 3 years and my average age is still over 12 years.
I am thoroughly confused by this. Debt is lower, interest is lower, triple checked there is no other incidents. Could it be that the Ag loan is considered revolving or somehow “lower quality”?
I’m not a pro but you asked for any feedback so here goes.
My vote is that the drop was caused by a “lower quality” loan.
Your car loan was secured with a lien on you car (title) while the lawnmower loan is unsecured. Tack that to the fact that a lot of “no interest for X period” loans are usually underwritten by some of the sleaziest lenders around. Those guys like to buy loans from retailers in the hope that the customer will not be able to meet the payoff deadline and end up in a very high interest personal loan.
My suggestion to you since you are already involved, pay off the loan ASAP. Some of those sleazebags like to slow down the payment process or use “accounting errors” to weasel interest out of you.
It’s probably because you’ve made no payments yet on the new loan. But here’s my real feedback:
Calm down.
The credit scores (there are several of them) are calculated by a wide variety of complicated formulas that aren’t public. 37 points is noise in the system – generally these numbers don’t like change of any kind, and you’ve made some. If there’s nothing real there (and it sounds like there isn’t), it’ll work itself out in a few months.
Seriously, you’re working yourself up over nothing. Trying to game a few points out of the system here and there is a recipe for stress.
So it went from a score that will qualify you for anything to one that will still get you qualified for virtually anything and you are in a panic? It is a credit score, not a video game. Like others said, making changes to your outstanding loans often causes a temporary dip. Make a few payments on the new loan and it should shoot back up within a few months. If you don’t need a another loan in the mean-time, it is about as much concern as any other random number.
That can’t possibly be true. Checking your own score is a soft-pull, whereas a hard credit check is a hard-pull. Only hard-pulls would lower his score.
Paying off installment loans really doesn’t do much good for your credit score. If you had paid down a 27K balance on a credit card, your score would likely have improved greatly (depending on your total revolving credit), but paying off a truck loan isn’t as good.
Opening up a new loan, on the other hand, will hurt your score. Credit hungry people tend to be people who are more financially stressed, so opening new accounts hurts. If you open 4 new accounts in 2 months, it would hurt a lot. If you open 1 new account, as you did, it hurts a little. The good news is that this should recover pretty quickly, as long as you are not opening more and more accounts. Within a couple of months your score should start going back up, and your score will again shortly be at its lofty heights (when the new account is no longer new).
As others have said, I wouldn’t worry about this. 740 is a pretty good score, and I assume that you aren’t planning on buying a house next month, so it won’t hurt you any. By the middle of 2013 your score will be right where you want it to be.
Also, as has been mentioned, checking your score frequently will NOT impact your score (unless you are doing it in a wrong, illegal, or stupid way).
Also debt to income ratio isn’t used - they don’t know your income.
Hard to say, but like has been said - that isn’t a big diff - it probably has to do with new account and in 3 months or so you’ll probably be back to close to where you were.
Keep in mind utilization is calculated when bill is cut - so even if you pay in full every month - it will look like you have $$$ outstanding. I did some analysis before on this based off my own score, others, and their simulators - and it appeared ~ 8 - 10% was optimal. This is revolving of course.
Perhaps I missed it but one number I didn’t see is the ratio of your current debt to your total credit line.
Suppose that I have 2 credit cards with a 5K limit and a 25K car loan for a total of $35,000 in available credit. I don’t carry a balance on the cards, and I have a balance of 2K on the car loan. Ratio: 6% (2K used of 35K available credit)
Now I close out the car loan (the reporting of this back to the credit reporting bureaus make take a couple of months) and I take out a new loan for 5K. Because it’s a new loan I owe all 5K of a 5K line. New ratio: 33% (5K used of 15K available credit).
The credit reporting bureaus use a variety of algorithms and automatic calculations, so this is not the only consideration. But I suspect this may be what is causing your drop.
The credit number is always irritating because it’s trying to figure out your credit worthiness and not your financial sensibility. You sound very financially sensible, and I think the fact that you check your credit is a great thing. When it comes to actually applying for something important–like a mortgage–a finer tooth comb is used, so don’t worry too much. But it’s still irritating to pay off a loan, have your total credit line diminished by that number, and see your credit rating drop.
The credit ratio calculation uses only revolving lines of credit such as credit cards.
A loan such as a typical car loan is not a revolving line of credit. When you pay down $2k of your $25k car loan, that does not entitle you to go back to the bank and get another $2k to buy something else. That portion of your credit is gone. Contrast this to a revolving line of credit where if you pay down $2k, you can go back and borrow $2k more immediately.
The $25k is not “available credit.” It is the original balance of your car loan.
I used as simple an example as possible for the sake of brevity, but I do not think it is correct that a credit ratio calculation (I am using the term loosely to get the concept across) uses only revolving lines of credit.
It is true that installment debt is handled differently from CC debt in most algorithms.
It is not true that the ratio of your current debt to your total outstanding lines does not make a difference, or that the size of the original installment loan versus the amount still due does not make a difference. It does.
Each reporting agency has its own nuances and to some extent they are kept proprietary. However if an individual exchanges an outstanding installment loan which is nearly paid off for an installment loan which is at the maximum limit for that credit line (because it is a new loan), they may well experience a drop in their credit score. I believe that is the most likely explanation in the OP’s case.
Not true if you use a monitoring service like Credit Karma. Yes doing an official check used to ding your score but these new services do not harm score, I check every day
