Living with credit

Worry about a score drop to low 800s? Not really.

John Egan

A friend of mine – we’ll call him David – has been obsessing recently over a drop in his credit score. You see, David says his score declined to the low 800s after he paid off his mortgage.

Wait a minute! David has been wringing his hands over his score having fallen to the low 800s? Credit scores range from 350 to 850, and the average U.S. FICO credit score hit a record 700 in April. Most Americans would be jumping for joy if their scores were in the low 800s. (I know I would be, although my score’s not too shabby.)

So, has David been agonizing for nothing? In short, yes.

First of all, let’s get something out of the way: David’s score didn’t go down simply because he paid off his mortgage, credit-scoring expert John Ulzheimer says.

“There’s no systemic reason that would happen. In fact, reducing the number of accounts you have with a balance helps your scores,” Ulzheimer tells me. (Note: We actually have multiple credit scores, not a single credit score.)

On top of that, installment debt like a mortgage is “almost meaningless” when calculating a credit score, so Ulzheimer wouldn’t have expected David’s credit score to fall – or rise – after paying off his mortgage.

“I had a similar experience a few years ago when I sold a house, and it eliminated almost $250,000 of debt,” Ulzheimer says. “My scores went up about 4 points. It’s counterintuitive, I know.”

What follows is a fuller explanation of this from Experian, one of the major credit-reporting bureaus. (Emphasis added by Experian.)

Taking out a mortgage can have a positive impact on your credit score because it builds up your mix of credit. However, paying off your mortgage won’t have a strong, positive impact, mainly because an installment loan – which is repaid over a designated period of time with a set number of scheduled payments – doesn’t lower your score to begin with.

This means that your credit score likely won’t experience huge gains when you finish paying off your loan, but you probably won’t see a noteworthy drop in points, either.

Bottom line: David’s credit score didn’t decrease because he wiped out his mortgage debt. Ulzheimer says David’s score must have fallen for some other reason(s). Maybe a new credit inquiry hit David’s credit reports. Perhaps the balance-to-limit ratio on his credit cards went up. Those and a number of other factors could trigger a decline in anyone’s credit score.

“There’s always a logical explanation,” Ulzheimer says. “There are a lot of possibilities.”

Whatever the cause, it’s “completely normal” for a credit score to move up or down by 20 points or so, according to Ulzheimer. This is known as “score migration.”

“The only time you should worry about a drop in your score is when it’s more considerable and stays lower,” Ulzheimer tells me. “And again, there’s an explanation for that, too. Something changed on the report, causing the much lower score, and it’s not being fixed.”

In light of all that, what’s Ulzheimer’s advice for David? Check the credit reports and credit score(s) to figure out why his all-important, three-digit number dwindled to the low 800s. “That way he will know for sure rather than guessing,” Ulzheimer says.

It’s easy to chuckle at David’s obsession over his credit score. But I do admire him for being so invested in his financial health. If we all behaved like that, we’d likely all have better credit scores.

However, I do worry a little that David’s anxiety over his financial health, specifically his credit score, could be harming his physical health. Thankfully, though, David’s credit-score obsession seems to have subsided.

Now, I’m going to go plot a strategy for boosting my credit score so it’s closer to David’s. But I promise I won’t obsess over it. Well, maybe just a tad.

See related: Zero to 750: What’s the fastest route to a high credit score?, Credit score obsession: 7 signs you have one, How I raised my score by 20 points in two months

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