Financial Lessons: Paying Off Debt Will Lower Your FICO Score
This post on being penalized with a lower FICO score for paying off debt early is post #6 in my series on financial freedom and spirituality.
Once upon a time, I had a FICO score of 900. Â Okay, okay, not really. Â It was actually something like 842. Â I had lots of credit card debt I paid off monthly in full (like a good girl), a mortgage, a second mortgage, and a car loan. Â But dang, I had a great FICO score! Now, it’s dropping to close to some of my deadbeat relatives’ scores.
When I was a kid, I was obsessed with making straight A’s. Â That’s not A-minuses either. Â It’s A’s. Â A’s and A-pluses. Â If there’s a score to be had–unless it’s…I don’t know…golf??? Â blood pressure????–I want a high score. Â High FICO scores are good, I’ve been told. Â Repeatedly.
So if I’m getting more out of debt (a good thing, right?), why is my FICO score tanking? Â Even though I pay off all monthly charges every month and have closed down credit card accounts I no longer need or use, my score is well below 842 as my net worth is increasing.
Time to shift perspective. Â A FICO score, as I’ve realized, is not about how financially responsible I am. Â No, it’s about how good I am at being in debt. Â It has nothing to do with what I’ve saved, what I’ve invested, Â how much I’ve paid off, or my net worth. Â Oh. Â Okay, then.
I paid off my car loan 3 years early. Â And my FICO score? Â It dropped. Â The loan was paid off, closed out, and nothing new opened in its place. Â No new loan, no new car–and I started paying down my house faster.
A higher FICO means a better interest rate on future loans, so a higher score can save me lots of money on future debt. Â Is it really a problem if I have a lower FICO score, given that I don’t really plan to take out a new mortgage or buy a new car with another loan? Â Probably not a problem for future loans I don’t plan to pursue. Â However, what if I take a 1-year assignment elsewhere and need to rent an apartment? Â My landlord may very likely judge my application based on my FICO score. Â Immediately disturbing to me is that my auto insurance rates may be based on my FICO score. Â More and more, FICO scores are a factor in any financial arrangement, even ones that don’t include a new debt. Â Though FICO scores reflect how well you sync with debt, they are used to determine financial responsibility overall.
And that’s the problem. Â A high FICO score just means you have debt and you pay it on time, not that you’re in a good place financially. Â You are rewarded for the right formula of debt, and punished for clearing up the financial and spiritual drag of making banks rich.
I am starting to understand exactly why my country’s finances are in such dire shape.