How to Make Sure You're Getting Good Credit Advice

When you get advice from a lender or loan officer about your credit, you probably assume they know what they are talking about. After all, they have reviewed lots of credit reports. But you can’t always be certain the advice is solid, as one of our readers recently learned.

“Mrs. B” wrote me after reading a story in which I was quoted. In that story, I talked about the fact that paying off an auto loan early can save you money on the interest, and should not hurt your credit scores.

She had been given the exact opposite advice at a car dealership:

My husband and I learned too late quickly paying off two joint automobile loans resulted in significantly lower FICO scores. My spouse and I were informed by a credit manager representing a respected automobile dealership that credit reporting bureaus are unable to evaluate consumer payment records when an installment loan (i.e. automobile) is paid in full before the half term expiration date.

For your information, both previous car loans were contracted for 60 month terms. The first was paid in full in six months; the second was paid in full in 12 months. However, to greatly increase individual credit score numbers…the credit manager advised remitting 23 out of 60 payments with the first amount of $8,000; then submitting 22 remaining bank assigned payment amounts of $247. This current loan will be paid in full in August 2014.

However I have learned through (your articles) that installment car loans should be quickly paid off. I would appreciate your (advice) if, or if not, FICO scores are negatively affected by quickly paying in full installment loans.

Mrs. B’s story is an example of why you can’t always believe the credit advice you get.

“Hogwash,” says Barry Paperno who worked at FICO for many years and has been a contributor for Credit.com. ”There’s absolutely no truth to the statement about credit reporting systems not evaluating loans paid off before the half-way mark. They still evaluate based on when opened, paid off/closed, current/late payments, original amount borrowed, etc.”

In other words, the fact that she paid these loans off quickly does not mean the FICO score can’t (or doesn’t) evaluate the information or use it when calculating her credit scores.

Furthermore, her paid off installment loans will still be reported on her credit reports for a number of years (usually about 10) and the fact that she paid on time continues to be a benefit overall to her credit scores.

What Caused the Credit Scores to Drop?

In her letter, Mrs. B. refers to their “significantly lower credit scores.” It is unclear whether she is saying that her scores dropped after she paid these loans off, or whether she is saying that they are lower than they would have been if the loans were paid over a longer period of time as the credit manager recommended.

Either way, it’s unlikely that her early payments had a significant impact on her scores. There are “typically one or two other more heavily weighted negative factors bringing the score down — especially if you’re talking about a high score dropping to a low score,” Paperno says. Sometimes scores do drop a bit when consumers pay off their installment loans, because their “mix” of credit no longer shows an open installment loan. Still “while no longer having an open installment loan on a credit report can result in a slight score drop, the impact would be the same whether the loan was paid early or over the full 60-month term,” says Paperno.

Without seeing her credit reports or scores it is hard to speculate about the problem, but it is possible that she and her husband have no credit references other than their auto loans. And if that’s the case, paying them off and having no other activity on their credit reports could mean lower scores. Consumers who don’t use credit often have a hard time building strong credit scores.

But if that’s Mrs. B’s problem, then another option would be to get a credit card as an additional credit reference. She can pay it in full each month to avoid interest charges.

Learn How to Tell Good Advice From Bad

Unfortunately our reader’s experience is not unusual. Over the years, we’ve heard from many consumers who were misled by a lender who was either misinformed or had a hidden agenda. To protect themselves, Mrs. B and her husband would be better off becoming their own “credit managers.”

And so should you. You can get your credit reports for free once a year at AnnualCreditReport.com. You can also get your free credit scores every month at Credit.com. It will give you a breakdown of the main factors impacting your scores and an action plan for your credit.

You have to be your own credit expert, so the next time someone gives you credit advice, you’ll know whether you are getting good counsel — or something else altogether.