Why did my credit score drop after paying off debt? (2024)

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

The most common reasons credit scores drop after paying off debt are a decrease in the average age of your accounts, a change in the types of credit you have and an increase in your overall utilization.

Paying off debt is generally wise and satisfying, so you may be surprised to find that your credit score dropped after you made a payment. Because credit scores are calculated using a variety of factors, the drop could have occurred for several reasons. The most common reasons credit scores drop after paying off debt are a decrease in the average age of your accounts, a change in the types of credit you have and an increase in your overall utilization.

As the major credit bureau Experian explains, credit scores can drop for a wide range of reasons, like closing a credit card, making late payments, or filing a bankruptcy. Compared to these events, one would think that paying off debt would raise your credit score, but that’s not always the case.

It’s important to note, however, that credit score drops from paying off debt are usually temporary. In general, the benefits of paying off debt outweigh the downsides of a reduced credit score. If your debt has a high interest rate, the amount you owe will continue to grow over time, so reducing the balance or paying it off entirely could save you a significant amount of money.

Still, you can make strong financial decisions by understanding why paying off debt can reduce your credit score in the short term—and you can work toward a higher credit score over time.

Your credit score is calculated based on several factors: payment history, credit utilization, credit age, number of inquiries, and types of credit. Paying off debt could affect one or more of these factors, which could explain the drop in your score.

Read on to learn why your credit score may have dropped after you pay off debt, other reasons your credit score may be lower and a few ideas for improving your credit.

Your average account age may have decreased

One ranking factor for your credit score is the length of your credit history, which includes the average age of your accounts.

If you pay off your oldest account and close it, the average age of your accounts will drop, which could lead to a decrease in your score.

While closed accounts will stay on your credit report for seven to ten years after you close them, they are viewed differently than open accounts.

Over time, your length of credit history and average account age will increase, so the drop that comes from paying off debt is likely temporary.

You may now have fewer types of credit

Another ranking factor for your credit score is the types of accounts you have on your report. In general, the credit bureaus who report your credit history want to see that you’re responsibly using several different types of credit.

For example, your credit report may list a few credit cards and an auto loan. If you pay off and close the auto loan, your credit mix now has less variety since it only contains credit cards. This could lead to a temporary drop in your credit score.

That said, it’s not necessary to go out of your way to take on as many different types of credit as possible. Instead, use different types of credit when you need them, making sure to pay on time. Over time, your credit score will recover with responsible use of credit.

Your credit utilization may have increased

An additional factor that affects your credit score is utilization, which is simply the amount of credit that you’re using out of the amount of credit available to you. Most lenders use the FICO^® scoring model, and FICO lists the following factors and how they’re weighted for your overall score:

• Payment history: 35 percent
• Credit utilization: 30 percent
• Credit history: 15 percent
• Credit mix: 10 percent
• New credit applications: 10 percent

As you can see, credit utilization is one of the most important factors impacting your credit score. For example, if your only account is a credit card with a $1,000 limit and you have a balance of $200, you’re using 20 percent of your available credit.

In general, lenders want to see that you’re using less than 30 percent of your available credit, as this signals that you’re able to manage your finances without leaning too heavily on credit.

If you pay off a credit card debt and close the account, the total amount of credit available to you will decrease. As a result, your overall utilization may go up, leading to a drop in your credit score.

As a rule of thumb, it’s often helpful to keep credit card accounts open even if you don’t use them often, unless they involve an annual fee or there’s another good reason to close them.

Other reasons your credit score could drop after paying off debt

Although the most common reasons for a score drop after paying off debt are listed above, there are a few other possibilities.

Here are some things to keep in mind if you notice a change in your score after paying off debt:

• You paid off an older collection account: In some cases, making payments on an old collection account can lead to the collection agency changing the date of the debt. Since the debt resurfaces as a newer account on your credit report, it may have a larger impact on your score.
• Not enough time has passed since paying off the debt: The credit bureaus may not get information about your debt payment for 30 days or more, so you’ll want to check your credit report to see whether the account is marked as paid off.
• Your score drop is unrelated to paying off debt: Although your credit score may drop after paying off debt, that may not be the reason your score dropped. Credit scores are a complicated calculation, and there could be many other reasons for a change in your score. For example, you may have applied for a new line of credit, have a missed payment on a different account, or have inaccurate information on your credit report.

Does paying off debt ever help your credit?

Yes, paying off a loan can improve your credit in the long run. These payments go into your credit history and show that you’re a responsible borrower. As you continue to pay on the debt, your credit score may gradually improve, so by the time you pay it off, you’re often still at a higher credit score overall after the temporary decrease.

In any case, if you notice a credit score drop, you’ll want to make sure to get a copy of your credit report. After looking at your report for each of the three credit bureaus—TransUnion, Experian, and Equifax—you’ll have a better idea of the information they’re reporting about you.

In addition to seeing whether your debt is shown as paid off, you’ll also want to pay close attention to any negative items or inaccurate information listed on your credit report. Unfair negative items can hurt your credit, and federal law allows you to dispute any items on your credit report that are unfair or inaccurate.

Filing a dispute to challenge false information is an important part of the process of repairing your credit and improving your score. For help looking over your report and disputing inaccurate information, consider working with a credit repair consultant at Lexington Law Firm, who can assist with every step of the process. Having an accurate and fair credit report is an important first step in working toward your credit goals.

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