Why did my credit score drop after paying off debt?


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Your credit score is a reflection of how well you manage your debt, so it seems like paying off a large balance should automatically improve your score. Unfortunately, this may not always be the case, at least in the short term. If you’re wondering why your credit score goes down when you pay off debt, you have to dig a little deeper into all of the factors that impact your credit score.

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Why did my credit score drop after paying off debt?

There are several factors that make up your credit score, and paying off debt does not affect all of them. Your credit report contains a range of information on your financial history, and all of those data points are used to create your credit score. So even after you pay off debt, there may be other factors that have a higher impact on your credit score.

Credit utilization

One area directly affected after you pay off debt is your credit utilization. Your utilization is calculated by dividing the balances you carry by your total credit limit across all of your cards.

This category of your credit score includes your credit utilization ratio for each credit card as well as your overall balances. Ideally, your balances should be between 10 and 30 percent of your available credit. If you paid off an account that had a low balance but your other cards are close to being maxed out, you may still see poor credit utilization. You can also be impacted if you pay off all of your debt and have no credit utilization.

Credit mix

Another reason your credit score could decrease is if you pay off an installment loan but still carry credit card debt. Installment loans (like car loans, student loans or home mortgages) have a set period in which they will be paid off. Credit card debt is considered “revolving” debt, which varies from month to month and does not have a set time period to repay. Installment loans don’t impact your score as heavily as revolving debts like credit cards and lines of credit, because there’s a set repayment period.

This category of your credit score is called your credit mix. Lenders like to see a mix of both installment loans and revolving credit on your credit portfolio. So if you pay off a car loan, you might actually see your credit score drop because you now have only revolving debt.

Age of your credit accounts

The average age of your credit accounts is another important factor in determining your credit score. Having many older accounts has a positive impact on your credit score, and having several new accounts is a negative contributing factor. If you pay off debt on an older account and subsequently close it, your credit score may drop.

New inquiries

When you pay off debt, your credit score may drop for totally unrelated reasons. One common reason is new inquiries on your report. Every time you apply for new credit where the creditor runs a hard credit check, it’s listed on your credit report. It stays there for two years and may result in a temporary drop in your score. If you applied for a loan or a new credit card around the same time you paid off your debt, you may have unintentionally caused a drop despite your lower overall debt.

How long does it take for my credit score to update after paying off debts?

Your credit score doesn’t update automatically, so it can take some time before you see whether paying off your debt helped or hurt your score. Expect to wait at least one to two billing cycles from your credit card before seeing your updated balance appear on your credit report.

Also remember that paying off your entire balance every month is not reflected in your utilization rate or, ultimately, your credit score. The balance that is used to calculate your utilization rate is based on your last statement balance. So, you could charge $900 on a credit card with a $1,000 limit and pay it off the same month, but the FICO credit score will still consider that a utilization rate of 90 percent.

How can I improve my credit score after paying off debt?

While paying off your credit card debt is important, what matters more is on-time payments and your utilization rate. Many times, borrowers will ignore these factors, thinking that clearing up their debt as quickly as possible is the key to a stellar score. But there are a few other methods to consider:

  • Be strategic with the order in which you pay off your debts. Personal loans and credit cards often have higher interest rates than mortgages, car loans and student loans. Paying those off first not only helps keep your credit utilization in check, it will also save you money in interest.
  • Check your credit utilization. When you’ve paid off your debt and the credit score has decreased, look to just how much of your credit you are using. If it’s above 30 percent, you might consider charging less each month. If that isn’t an option, you could speak with your issuer about increasing your credit limit. Both of those should help increase your credit score.
  • Open another credit card. While opening accounts could temporarily lower your score due to hard credit checks, opening a new card could increase your total available credit and spread your charging among several cards.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Next steps

It’s almost never a bad idea to pay off debt, especially high-interest consumer debt. This holds true even if it causes your credit score to temporarily go down. Your financial health is more important than your credit score, especially because there’s no way to fully predict the results of each action you take. Ultimately, if you continue to make timely payments on your outstanding debts and keep your spending in check, you should see your credit score start to rise again with time.

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