Highlights:
- It’s possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt.
- Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
- While in some cases your credit scores may dip slightly from paying off debt, that doesn’t mean you should ever ignore what you owe.
While paying off your debts often helps improve your credit scores, this isn’t always the case. It’s possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt.
However, that doesn’t mean you should ignore what you owe. The benefits of paying your debts are far greater than the drop that you may see in your credit scores, and the negative impact is likely to be temporary.
What elements affect my credit scores?
To better understand why you could see lower credit scores after paying off debt, consider the elements that go into calculating your scores.
Your credit scores are based on information from your credit reports, which are generated by each of the three nationwide consumer reporting agencies (CRAs). The nationwide CRAs — Equifax, TransUnion and Experian — receive information about your lines of credit such as personal loans, credit cards and auto and mortgage loans.
Your credit scores are then calculated based on a formula that determines your creditworthiness, or how likely you are to make your debt payments on time. Credit scores are one factor that lenders may consider when deciding whether to extend credit to you.
There are many formulas used to calculate credit scores. However, most consider the following factors:
- Payment history. Your payment history shows how you have repaid credit in the past. Certain behaviors, such as late or missed payments, can have a negative impact on your scores.
- Length of credit history. Your credit reports track the amount of time your credit accounts have been active. A longer credit history can have a positive effect on your scores.
- Newer lines of credit. Any recent credit accounts you have opened are also taken into consideration when calculating your credit scores.
- Credit mix. Your mix of credit accounts — including loans, credit cards and mortgages — is generally considered when calculating your scores, and a diverse credit portfolio can have a favorable impact.
- Credit utilization ratio. The amount of revolving credit you’re using divided by the total credit available to you is known as your credit utilization ratio and can also have an impact on your scores.
Why might my credit scores drop after paying off debts?
Paying off debt might lower your credit scores if removing the debt affects certain factors such as your credit mix, the length of your credit history or your credit utilization ratio.
For example, paying off your only installment loan, such as an auto loan or mortgage, could negatively impact your credit scores by decreasing the diversity of your credit mix. Creditors like to see that you can responsibly manage different types of debt. Paying off your only line of installment credit reduces your credit mix and may ultimately decrease your credit scores.
Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop. This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio. Additionally, if the account you closed was your oldest line of credit, it could negatively impact the length of your credit history and cause a drop in your scores.
When will my credit scores improve after paying off my debts?
Paying off debt is more likely to help your credit scores than to hurt them. You are likely to see your credit scores improve after paying off debt unless the debt you repaid meets the unique criteria listed above.
How long after paying off debt will my credit scores change?
The three nationwide CRAs generally receive new information from your creditors and lenders every 30 to 45 days. If you’ve recently paid off a debt, it may take more than a month to see any changes in your credit scores.
You can receive free Equifax credit reports with a myEquifax account. You can also get free credit reports annually from the three nationwide consumer reporting agencies - Equifax, TransUnion and Experian - at AnnualCreditReport.com.
Should I always pay off my debt?
While in some cases your credit scores may dip slightly from paying off debt, that doesn’t mean you should ever ignore what you owe.
Generally speaking, the damage to your credit scores that may result from paying off debt is unlikely to be permanent. It’s always a good idea to keep up with your debt payments and repay what you owe. The long-term benefits to your credit scores and the ability to live debt-free are well worth it.
FAQs
Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop. This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio.
Why does a credit score drop after paying off debt? ›
Why credit scores can drop after paying off a loan. Credit scores are calculated using a specific formula and indicate how likely you are to pay back a loan on time. But while paying off debt is a good thing, it may lower your credit score if it changes your credit mix, credit utilization or average account age.
What are the reasons why a person's credit score may decrease? ›
Your credit score might drop if someone uses your identity to apply for credit cards, a mortgage or other loans. A fraudster could trigger hard inquiries due to card applications, late payments or high credit card balances if a card is successfully acquired. All can lower your credit score.
Why would my credit score have dropped? ›
Lenders and other service providers report arrears, missed, late or defaulted payments to the credit reference agencies, which may have a negative impact on your credit score. Making payments on time is an important way to show you can manage your finances responsibly.
Why did my credit score drop so much after getting a credit card? ›
That's because a new credit application generally creates a hard credit inquiry, which can cause your credit scores to drop by a few points. Multiple credit applications in a short period of time could also indicate that your financial situation has changed negatively—and they might cause your credit scores to drop.
How does paying off a credit card affect your credit score? ›
Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.
How many points does your credit score go up after paying off debt? ›
If you're close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt. Yes, even if you pay off the cards entirely.
Why did my credit score drop 40 points for no reason? ›
Reasons why your credit score could have dropped include a missing or late payment, a recent application for new credit, running up a large credit card balance or closing a credit card.
What decreases a credit score? ›
Actions that can lower your credit score include late or missed payments, high credit utilization, too many applications for credit and more. Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
What are three mistake that could reduce your credit score? ›
Not checking your credit score often enough, missing payments, taking on unnecessary credit and closing credit card accounts are just some of the common credit mistakes you can easily avoid.
If you've made a late payment or have other derogatory information listed on one of your credit reports, it could cause your score to drop at least 30 points. Also, using more of your available credit or closing one of your oldest credit card accounts could cause a large drop in your score.
What drops your credit score the most? ›
5 Things That May Hurt Your Credit Scores
- Making a late payment.
- Having a high debt to credit utilization ratio.
- Applying for a lot of credit at once.
- Closing a credit card account.
- Stopping your credit-related activities for an extended period.
Various weighted factors mean that even with no credit, your credit score could still be low because the length of your credit history or credit mix, for example, could also be low.
Why did my credit score drop 60 points for no reason? ›
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.
Why did my credit score drop 50 points after getting a credit card? ›
You applied for a new credit card
Card issuers pull your credit report when you apply for a new credit card because they want to see how much of a risk you pose before lending you a line of credit. This credit check is called a hard inquiry, or “hard pull,” and temporarily lowers your credit score a few points.
Why did my credit score drop 100 points after buying a house? ›
Fortunately, it's not uncommon for your credit score to dip after a major credit purchase. Additionally, the ding to your credit score will be temporary so long as you make your payments on time every month.
How long does it take to rebuild credit after paying off debt? ›
It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.
How long does it take for your credit score to go up after paying off a car loan? ›
Whenever you make a major change to your credit history—including paying off a loan—your credit score may drop slightly. If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months.
How long does it take to improve credit score 100 points? ›
In fact, some consumers may even see their credit scores rise as much as 100 points in 30 days. Steps you can take to raise your credit score quickly include: Lower your credit utilization rate. Ask for late payment forgiveness.
Should I pay off my credit card in full or leave a small balance? ›
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
