This financial columnist paid off her mortgage — and her credit score tumbled

One of the quirks of the United States' financial system is the fact that one can pay off a large debt and watch their credit score decrease as a result.

That recently happened to Washington Post financial columnist Michelle Singletary, whose FICO score went from 850 to 826 after she paid off her mortgage. In her September 8 column, Singletary explains why her score "dropped 24 points."

"There's no financial tragedy here," Singletary explains. "Once your score goes beyond the mid-700s, the credit-scoring algorithm considers you an exceptional user of debt. But many consumers in the FICO top tier often bemoan losing points after paying off a mortgage or auto loan…. How can doing something so right affect your credit history so negatively?"

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To answer her question, Singletary interviewed FICO exec Ethan Dornhelm.

"The best things you can do to boost your score are to make on-time payments and pay down your debt, but here's why your score may drop after paying off an installment loan," Singletary explains. "Once you repay the loan, it's no longer in the credit mix category. Dornhelm said FICO's analysis of millions of consumer credit files has found that having a low installment-loan-balance-to-loan-amount ratio is simply a little less risky than having no active installment loans at all."

The financial columnist adds, "The elimination of data that demonstrates active, regular, on-time payments may mean some consumers see a temporary dip in their FICO scores, he said."

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Read Michelle Singletary's full Washington Post column at this link (subscription required).