A Chicago resident was left frustrated after a seemingly sensible act of financial planning resulted in their credit score decreasing.
When Archie made the final payment on a 60-month loan taken out to pay for a 2012 Chevy, it felt like a weight had been lifted.
The average American is living with a considerable amount of debt. According to Experian data, in 2023, a typical U.S. adult holds a debt balance of $104,215 in what amounts to a 2.3 percent increase on the figure reported a year earlier.
Paying off a car loan might represent a sensible step in easing some of that burden, but it had repercussions for Archie, who chose not to provide a second name.
Archie paid off a car loan, contributing a decrease in credit score.
TikTok/smarchway
“I got a notification from Credit Karma that my score had changed,” Archie told Newsweek. “One of the two reasons Credit Karma gave me was that my auto loan account ‘was closed,’ and that that affected my score because lenders like to see long-standing accounts.”
Credit scores play an important part in helping people get approved for things like mortgages or personal loans. They are supposed to demonstrate an individual’s reliability to potential lenders.
In truth, Archie “wasn’t surprised” that this happened: “I know that’s how credit scores work” but still felt it highlighted how “the credit system is fundamentally flawed in its concept, execution and implementation.”
According to Experian, there are three reasons why paying off a loan can lead to a decrease in credit score.
It could be that this is Archie’s only type of installment loan.
“Lenders like to see that you can manage a variety of different types of debts,” Experian explained on CNBC. “Considering your mix of credit makes up 10 percent of your FICO credit score, paying off the only line of installment credit can cost you some points.”
It may also be that Archie paid off the lowest balance account, which would make sense if this was the final installment on a car loan.
“The outstanding balances across all of your open credit accounts, or your amounts owed, makes up 30 percent of your credit score,” Experian said. “If the installment loan that you paid off had the lowest balance, thus bringing down the average amount owed and leaving your only remaining active accounts with high balances, your credit score may drop.”
Or it might be a result of other external factors, financial or otherwise. Whatever the case, Archie was frustrated enough to create a video on TikTok under the handle Smarchway, slamming the development as “a literal joke.”
Archie now intends to “continue to accrue and pay off the right amount of debt” in order to boost the credit rating.
“Pretty much anything can negatively affect your score, that’s why it’s a joke,” Archie said.
Though the video was certainly about venting frustrations, Archie said: “I hope what people take from my experience is that you can do everything right and still get penalized by the systems we have no choice but to participate in.”
