Is your score always better when it includes a paid-off loan?

This post originally appeared December 14, 2017 on CreditCards.com as “‘Adding paid-off credit account to my report; is it worth it?

By Barry Paperno

Dear Speaking of Credit,
I purchased a vehicle from a dealership and paid off that vehicle. How can I add that payment history to my credit report and credit score? – Groanis

Dear Groanis,
It sounds like the dealership provided you with financing that wasn’t reported to the credit bureaus.

The loan’s omission from your credit report most likely resulted either from a reporting error or the lender simply choosing not to report loans to the credit bureaus.

If you haven’t already done so, it would be well worth your while to contact the lender for a better understanding of their credit reporting policy.

If a reporting error is the cause, they should be able to fix it. Otherwise, the loan will have to remain off your credit report, as only the lender can report a credit account to the credit bureaus.

There’s a tendency to assume that all credit appears on our credit reports – since it almost always does.

However, it’s helpful to remember that credit reporting is a voluntary system in which lenders, collection agencies and other businesses share and acquire information as credit bureau subscribers which, incidentally, pay large sums to participate.

Is there intrinsic value in adding accounts to credit reports?
Left out of this system are consumers for whom there is no way to report their own credit. Yet, disappointing as it may be, you are about to learn why your credit score might not have achieved the positive impact you were anticipating anyway.

Simply adding a credit account to your credit report is no guarantee of a better score.

To illustrate, let’s examine some of the best and worst credit scoring dynamics you might have experienced had you been able to report the loan to the bureaus after payoff:

Payment record
How timely you were in paying the loan from beginning to end would have the biggest credit score impact for both revolving credit (cards) and installment credit (loans):

  • Positively. Adding a perfectly paid account to a credit report that was already reflecting some late payments can increase your proportion of “good” to “bad” accounts.
  • Negatively. If the loan were to include a more-recent late payment than any other late payments on the credit report, the “length of time since your most recent delinquency” – a very influential factor – would shorten. Short hurts; longer is better.
  • No effect. Adding a perfectly paid account to a credit report filled with other perfectly paid accounts simply won’t affect your score. Nor will adding a loan containing late payments that predate all other existing late payments on the report.

What you owe
The scoring category that evaluates your debt level includes credit utilization calculations that measure how much available credit is being used among both credit types:

  • Revolving utilization compares a card balance to its credit limit.
  • Installment utilization measures how much of the original balance has been paid down.

However, neither of these utilization formulas applies to closed accounts with a $0 balance, such as your paid-off (closed) loan. So, your score would receive no benefit from this scoring category upon being added to your credit report.

Credit age
If, when added, your loan would have been among your older accounts, your credit score could have been helped by a higher average account age within the length of credit history calculations.

Or better yet, if the loan would have been your oldest account, its inclusion could have added a few points to your score by also increasing the age of your oldest account, another important factor.

On the other hand, if this was your most recently opened account compared to the rest of your credit report, its presence may have shortened both your average account age and the length of time since your most recent account opening – another important age-related calculation.

Kinds of credit
Factors making up the least-important scoring category, credit mix, can award points simply for having at least one open installment and one open revolving account.

Had your loan been reported when first opened, and had it been the first loan on your credit report accompanying at least one open card, you could have received a few more points back than just for having added the open loan.

But once your loan was paid off and closed, you would have then seen those points taken away.

Therefore, adding your loan now that it’s closed would not have helped your score in this category.

Other options to build or rebuild your credit
You can now see how your score may not have dropped at all by its absence from your credit report.

If by adding it you expected to advance any credit building or rebuilding plans, don’t despair.

There are other ways to add positive information to your credit report, including:

  • Applying for a secured credit card, which requires collateral for approval – usually a cash deposit with the issuing institution.
  • Asking a relative or friend with stellar credit to add you as an authorized user on one of their cards.
  • Requesting a “credit builder” installment loan. These are small loans, made by some credit unions and a few banks, designed to help consumers establish or boost a credit profile.

Importance of reporting credit activity to bureaus
Having now lived and learned from this experience, you now know what you should do with your next credit account.

Whether it’s one of the ways to establish credit mentioned above, another car loan, a mortgage or something else entirely, make sure the account will be reported to all three credit bureaus on a monthly basis.

In most cases it will be.

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