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.  Okay, okay, not really.  It was actually something like 842.  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.  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.  That’s not A-minuses either.  It’s A’s.  A’s and A-pluses.  If there’s a score to be had–unless it’s…I don’t know…golf???  blood pressure????–I want a high score.  High FICO scores are good, I’ve been told.  Repeatedly.

So if I’m getting more out of debt (a good thing, right?), why is my FICO score tanking?  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.  A FICO score, as I’ve realized, is not about how financially responsible I am.  No, it’s about how good I am at being in debt.  It has nothing to do with what I’ve saved, what I’ve invested,  how much I’ve paid off, or my net worth.  Oh.  Okay, then.

I paid off my car loan 3 years early.  And my FICO score?  It dropped.  The loan was paid off, closed out, and nothing new opened in its place.  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.  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?  Probably not a problem for future loans I don’t plan to pursue.  However, what if I take a 1-year assignment elsewhere and need to rent an apartment?  My landlord may very likely judge my application based on my FICO score.  Immediately disturbing to me is that my auto insurance rates may be based on my FICO score.  More and more, FICO scores are a factor in any financial arrangement, even ones that don’t include a new debt.  Though FICO scores reflect how well you sync with debt, they are used to determine financial responsibility overall.

And that’s the problem.  A high FICO score just means you have debt and you pay it on time, not that you’re in a good place financially.  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.