Why does your credit score drop when you pay off a car loan?
A friend of mine was furious the other day, when he saw that paying off his car loan caused his score to drop about 40 points.
Why does this happen?
Two reasons.
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The official reason is that your credit score, in part, is based upon having a mix of different types of open credit—revolving, like credit cards; and installment, like auto and mortgage loans. If you close your last installment loan, this affects the "mix" in a way that drops your score.
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I think I prefer the Luxembourg way of dealing with things! If you miss a payment of some sort the creditor informs the Luxembourg National Bank who put your name on a no-credit list - when you have paid the outstanding debt, your name is removed from the list. Anyone or any company who is not your creditor or the Bank Of Luxembourg holding such information is committing a criminal offence!
@Paulos_the_fog Short for "refinance" - to get a new loan (presumably under better terms) to pay off an old one.
A colleague did that. He swapped a mortgage @ around 5% pa for one at 1.44% pa fixed rate throughout the term of 22 years.
He lives just over the border, in France where most mortgages are at fixed interest rates for the whole period of the loan!
@Paulos_the_fog BRB, looking to refi in Luxembourg....