Can Paying off Installment Loans Cause a FICO® Score To Drop?
FICO® Scores weigh the amounts paid down and balances of mortgage and non-mortgage installment loans (such as auto or student loans) against the original loan amounts. In general, when an installment loan is first obtained the balance is high.
As the loan is paid down, the balance decreases which may have a positive impact on the score. However, analysis of credit data shows that having a low installment loan balance to loan amount ratio is even less risky than having no active installment loans at all. As a result, paying off the last of your active installment loans can result in a loss of points.
Note, even after a consumer has paid off their installment debt(s), it is still possible to have a very high FICO Score, by actively and responsibly managing other types of accounts.