There is a lot of misunderstanding about credit scores posted here.
The purpose of credit scores is to answer only one question:
How good are you at pay back a debt if someone were to loan you some money?
Thats it. Everything on how the score is calculated is weights and measures to service that question.
The reason that making payments on an active loan improves your score, is because it is real proof you are getting money from somewhere (the credit score doesn’t care where) and you’re choosing to spend that money on an agreed payment on the debt. Lets say I’m a lender and I’m considering giving you money, and I see that someone prior to me make a similar agreement, and you’re honoring that agreement to pay, then it gives me a good reason to think you’ll also pay on debts you have with me. The reason your score goes down when you pay off your last loan, is because I can’t see you still have the money to pay on a new loan. It means you’re a (slightly) higher risk because I’ll have to take it on faith that where ever you got the money to pay off the last one, you’ll also be able to get that money to pay off the one to me. There’s no guarantee for that, so its a risk to me, a lender.
Another thing I’m seeing missing in the discussion here is:
“Doing X makes your credit score go down”
Technically true, but many of those things that make it go down only do so for a short time. Maybe a month or two (using modern FICO score system).
There can be arguments as to which inputs they use, and how much each of those inputs affects the score. So much so, rating agencies themselves even change their minds over time. They update what they think is important and downgrade what they think matters less. You’ve likely heard of a FICO score. Over time there have been SIXTEEN DIFFERENT VERSIONS of what makes a FICO scoresource. Some of the variation you see when you get your score from different places is those places using slightly newer or older versions of the scoring system.
Unfortunately lots of organizations that have nothing to do with lending you money are choosing to use your credit score for their own systems. I’ve heard of insurance companies using FICO scores as inputs to how they calculate premiums, which they shouldn’t do. Some employers are using these now to filter applicants. Those employers are perverting the credit score system (again, a system just for loaning money) as a measure of trustworthiness or fidelity. I wouldn’t mind laws that prevent that as that isn’t what credit scores are designed for, and doesn’t answer that question.
How good are you at pay back a debt if someone were to loan you some money?
That’s the point!!!
The only information we are given is that the OP paid off a debt and the credit score went down. You claimed that maybe it is only temporary. But that still goes against your giant text claim.
Why does paying back a debt announce that you are bad at paying back a debt?
There is a lot of misunderstanding about credit scores posted here.
The purpose of credit scores is to answer only one question:
How good are you at pay back a debt if someone were to loan you some money?
Thats it. Everything on how the score is calculated is weights and measures to service that question.
The reason that making payments on an active loan improves your score, is because it is real proof you are getting money from somewhere (the credit score doesn’t care where) and you’re choosing to spend that money on an agreed payment on the debt. Lets say I’m a lender and I’m considering giving you money, and I see that someone prior to me make a similar agreement, and you’re honoring that agreement to pay, then it gives me a good reason to think you’ll also pay on debts you have with me. The reason your score goes down when you pay off your last loan, is because I can’t see you still have the money to pay on a new loan. It means you’re a (slightly) higher risk because I’ll have to take it on faith that where ever you got the money to pay off the last one, you’ll also be able to get that money to pay off the one to me. There’s no guarantee for that, so its a risk to me, a lender.
Another thing I’m seeing missing in the discussion here is:
“Doing X makes your credit score go down”
Technically true, but many of those things that make it go down only do so for a short time. Maybe a month or two (using modern FICO score system).
There can be arguments as to which inputs they use, and how much each of those inputs affects the score. So much so, rating agencies themselves even change their minds over time. They update what they think is important and downgrade what they think matters less. You’ve likely heard of a FICO score. Over time there have been SIXTEEN DIFFERENT VERSIONS of what makes a FICO score source. Some of the variation you see when you get your score from different places is those places using slightly newer or older versions of the scoring system.
Unfortunately lots of organizations that have nothing to do with lending you money are choosing to use your credit score for their own systems. I’ve heard of insurance companies using FICO scores as inputs to how they calculate premiums, which they shouldn’t do. Some employers are using these now to filter applicants. Those employers are perverting the credit score system (again, a system just for loaning money) as a measure of trustworthiness or fidelity. I wouldn’t mind laws that prevent that as that isn’t what credit scores are designed for, and doesn’t answer that question.
That’s the point!!!
The only information we are given is that the OP paid off a debt and the credit score went down. You claimed that maybe it is only temporary. But that still goes against your giant text claim.
Why does paying back a debt announce that you are bad at paying back a debt?