Why Did My Credit Score Drop After Paying Off Debt?
Paying off debt should feel like a financial victory. And, in most cases, it is. Reducing debt is almost always a smart move for your financial health. However, it can sometimes cause a temporary dip in your credit score. Understanding why this happens and what you can do about it can help you stay focused on your long-term credit goals.
Here are five common reasons your credit score might drop after paying off debt.
- Paying off debt could temporarily lower your credit score depending on how those actions impact your credit utilization, credit age or account mix.
- Multiple factors influence your credit scores, including your credit utilization ratio and the types of credit you use.
- Staying current on your credit obligations and giving your score time to recover are often the best ways to move past credit setbacks.
1. The average age of your accounts dropped
Impact: 15% of FICO® Score and 20% of VantageScore
Sometimes when you pay off a debt, you or a creditor might close the account afterwards. Those account closures could cause problems with certain credit scoring models if it reduces your average age of credit accounts. Length of credit history is worth 15% of your FICO Score and — combined with credit mix — influences 20% of your VantageScore credit score.
When you apply for financing, lenders commonly use FICO or VantageScores to assess your risk as a potential borrower. With FICO Scores (the score lenders use most often), closed accounts still factor into age-related credit calculations. So, even if you pay off a loan or close a paid credit card, the account still counts toward your length of credit history as long as it remains on your credit report (up to 10 years for positive accounts). Of course, closing an account could have other negative impacts on your FICO Score that we cover below.
With VantageScore, closing an account may be more problematic. Depending on the type of account and your credit profile, an account closure might reduce your average age of credit and damage your VantageScore credit scores in the process.
How to fix it
Aging your credit profile takes time. But you can avoid potential damage in this area by keeping your credit cards open unless there’s a good reason to close them (like high fees on accounts you no longer use or joint credit cards you need to close during a divorce). If you have multiple credit cards, use them on occasion to keep them active and avoid having card issuers close your accounts due to inactivity.
You might also consider having a friend or family member add you as an authorized user onto a well-managed, older credit card account. Becoming an authorized user on an older account might benefit your credit scores if it increases your length of credit history.
2. Your credit utilization went up
Impact: 30% of FICO Score and 20% of VantageScore
If the debt you paid off was a credit card and you or the credit card issuer closed the account after payment, your credit utilization ratio might have increased without you realizing it. Credit utilization is a measure of the available credit you’re using on a single credit card account and across all of your credit cards combined (called aggregate utilization). The higher the ratio climbs, the worse the impact on your credit score. Credit utilization is a key factor that influences 30% of your FICO Score and makes up 20% of your VantageScore credit score.
In most cases, paying down credit card debt is good for your credit score. But when you close a card after paying it off (or if your credit card company closes your account), your overall credit limit shrinks — which could increase your utilization if you carry balances on other accounts. In this scenario, you might see a credit score drop that’s not really from paying down debt, but from the resulting increase in your credit utilization ratio triggered by the account closure.
How to fix it
The best way to manage a credit card is to keep your balance low and pay off the full amount you charge each month — on or before the due date. These good habits can help you keep your credit utilization ratio low, avoid interest and maintain on-time payment history.
Additionally, it’s usually smart to keep credit cards open unless you have a good reason to cancel an account. If you avoid closing credit cards (especially paid-off accounts), you don’t have to worry about accidentally lowering your credit utilization ratio and potentially hurting your credit score by mistake.
If your score drops because a credit card issuer closes your account, consider applying for a new credit card elsewhere. But you may want to pay off your other credit card debt first to make sure your credit utilization ratio (and hopefully your credit score) is in good shape before submitting new financing applications.
3. You have fewer credit account types
Impact: 10% of FICO Score and 20% of VantageScore
Lenders and scoring models like to see a healthy mix of different credit types on credit reports. Having a combination of revolving accounts (like credit cards) and installment loans (like auto or student loans) can be good for your credit score. Credit mix makes up 10% of your FICO Score and, combined with age of credit, makes up 20% of your VantageScore credit score.
If you pay off debt and close your only open revolving credit or installment credit account in the process, you could inadvertently reduce your credit mix. And when you have less diversity on your credit report in terms of account types, it might hurt your credit score.
How to fix it
If you’re brand new to credit, it’s fine to consider building credit with a credit card and perhaps an installment account like a credit builder loan. But if you already have established credit, it can be risky to keep opening new accounts just because you’re chasing the perfect credit mix.
This behavior could create new debt that does more harm than good in the long run. Plus, applying for new credit adds new hard inquiries to your credit report and lowers your average age of credit — two factors that may reduce your credit score temporarily instead of improving it.
Instead, it’s best to keep revolving credit accounts open unless there’s a good reason to close them. And when it comes to installment loans, allow credit mix to come naturally as you need to apply for financing in the future such as auto loans, mortgages, personal loans and more.
4. Your credit score hasn’t updated yet
Impact: Varies
Credit scores don’t update in real time. Lenders typically report to the three major credit bureaus — Equifax, TransUnion and Experian — once a month. If you paid off a debt recently, it could take weeks or even a full billing cycle before your account reflects those changes. In the meantime, your credit score may still be based on older account data.
How to fix it
When it comes to credit report updates (and any potential credit score improvements from those updates), you have to be patient. However, you can monitor your credit with a tool like LendingTree Spring so you’ll know right away once changes take place.
5. The drop isn’t related to paying off your debt
Impact: Varies
There are many factors that can affect your credit score, and sometimes the timing is just a coincidence. If your credit score dropped right after you paid off a debt and you can’t figure out why, look over the rest of your credit report to see if anything else has changed.
Your score could have dropped for another reason such as a missed payment, a new hard credit inquiry or a higher credit utilization ratio on your credit cards. Credit scoring models are sensitive, and even minor changes might trigger big fluctuations.
How to fix it
Review your credit reports and try to identify the reason (or reasons) your credit score dropped. Check each of your three credit reports for potential issues including:
- Late payments
- Credit limit changes
- New collection accounts
- Errors or incorrect information
Depending on what you find on your credit reports, take action if you can. For example, for an increased credit utilization ratio, pay down your credit card balances if possible. And if you find a suspicious item on your credit report, like an error, it’s important to dispute the mistake with the appropriate credit bureau.
If you can’t figure out why your credit score dropped, it can be helpful to request copies of your credit reports and review them. You can access free copies of your three credit reports online once a week.
Is paying off debt bad for my credit?
Usually, paying off debt is not bad for your credit score. Yet in some cases, paying off an account might cause a temporary credit score dip, especially if your debt elimination efforts trigger related consequences like account closures that impact your credit utilization ratio or credit mix.
In the long run, reducing debt can be a solid move for your financial security and your long-term credit health. Owing less debt frees up cash flow, lowers interest costs and reduces stress. If you do experience a credit score drop, it’s often temporary. And the long-term benefits usually outweigh any short-term credit setbacks. Plus, as long as you continue to manage your credit responsibly in the future, your credit score should recover over time.
Frequently asked questions
Paying off debt can sometimes increase your credit score. But it depends on which debts you pay off and how those accounts affect your overall credit profile. Some scores may rise, while others could drop temporarily.
Many credit scores rebound within a few months. But every credit report is different. You’ll need to figure out why your credit scores dropped for a better understanding of how long recovery might take (with good credit management habits).
Not all lenders report to all three credit bureaus. A change might only show up on one of your credit reports, or different credit bureaus may update your reports at different times.
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