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
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.
Why did my credit score go down after paying off debt? ›
It might reduce the types, or 'mix,' of credit you have
But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip — even though you did exactly what you agreed to do by paying off the loan.
Why does your credit score go down when you fall behind on payments? ›
If you are more than 30 days past due on a payment, credit issuers will report the delinquency to at least one of the three major credit bureaus, likely resulting in a drop in your score. Payments that become 60 or 90 days past due will have an even greater effect on your score.
Why did my credit score suddenly drop so much? ›
A sudden drop in your credit score can often be explained by something you have done—or forgotten to do—such as paying your credit card bill late. If you're certain you haven't done anything to cause the drop, it's possible you've been a victim of identity theft.
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.
Why did my credit score drop by 100 points? ›
Missed Payment. One of the biggest reasons for a credit score drop is a missed or late payment. If you have perfect credit and hit a financial roadblock, a 30-day late payment can drop your credit score by up to 100 points. Typically, creditors won't report a late payment until it's at least 30 days late.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
How long does it take to get credit score up after paying off debt? ›
Your credit score can take 30 to 60 days to improve after paying off revolving debt. Your score could also drop because of changes to your credit mix and the age of accounts you leave open.
How to raise your credit score 200 points in 30 days? ›
How to Raise your Credit Score by 200 Points in 30 Days?
- Be a Responsible Payer. ...
- Limit your Loan and Credit Card Applications. ...
- Lower your Credit Utilisation Rate. ...
- Raise Dispute for Inaccuracies in your Credit Report. ...
- Do not Close Old Accounts.
Heavy credit card use, a missed payment or a flurry of credit applications could account for a credit score drop. Amanda Barroso is a personal finance writer who joined NerdWallet in 2021, covering credit scoring.
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO® Score☉ in the U.S. reached 715.
Why does paying off a loan hurt credit? ›
However, when you pay off an installment loan, your credit report shows the account as closed, which could cause your credit score to drop. When calculating your credit score, FICO weighs open accounts more heavily than closed accounts.
Why did my credit limit decrease after paying off debt? ›
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.
What happens if I pay off all my debt at once? ›
Paying your entire debt by the due date spares you from interest charges on your balance. Paying off your credit card debt in full also helps keep a lower credit utilization ratio, which measures the amount of your available revolving credit you're using.
What to do after paying off debt? ›
Here are some next steps you can take that could help you on a path toward continued financial health.
- Start Retirement Savings. The sooner you start saving for retirement, the better off you'll be. ...
- Tackle Another Debt. ...
- Create a Safety Net. ...
- Save for a Major Purchase. ...
- Use What You've Learned.
you might have paid your bills on time, but you also need to check the balance you carry on each credit card. if you have a high credit utilization ratio, it can cause a drop in your credit score. you should check your credit limit usage on both an overall and per-card basis.
Why has my credit score gone down when nothing has changed? ›
Things like new credit applications and missed payments may impact your credit score. You may be able to improve your credit score in a number of ways, including making sure you're on the electoral register, managing accounts well and limiting new credit applications.
Should I pay off my credit card in full or leave a small balance? ›
If you regularly use your credit card to make purchases but repay it in full, your credit score will most likely be better than if you carry the balance month to month. Your credit utilization ratio is another important factor that affects your credit score.
How rare is 825 credit score? ›
Membership in the 800+ credit score club is quite exclusive, with fewer than 1 in 6 people boasting a score that high, according to WalletHub data.
Is a 900 credit score possible? ›
Highlights: While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.
You'll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with scores as low as 500. Whether you qualify for a specific loan type also depends on personal factors like your debt-to-income ratio (DTI), loan-to-value ratio (LTV) and income.
How much will my credit score change if I pay 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.
Does paying off a loan early hurt credit? ›
In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.
Is it better to pay off your credit card or keep a 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.
How long does it take for something to come off your credit report after you pay it off? ›
In general, most debt will fall off of your credit report after seven years, but some types of debt can stay for up to 10 years or even indefinitely. Certain types of debt or derogatory marks, such as tax liens and paid medical debt collections, will not typically show up on your credit report.
