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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Paying off debt is a huge win, so you might be disappointed to find out that paying off debt can cause a drop in your credit score. While seeing the points drop in your credit score can feel like a loss, understanding why can help you make a plan to bump your score back up. Your credit score is determined by more than just debt. Your credit utilization ratio and average age of debt — among other factors — influence your credit score. Understand the factors that impact your credit score and how you can even after paying off debt. Get pre-qualified
Why credit scores can drop after paying off a loan
Credit scores are calculated using a 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, or average account age. You eliminated your only installment loan or revolving debt
Creditors like to see that you’re able to manage various types of debt. Ideally, your debts should be a mix of installment debts like loans and revolving debts like credit cards. If eliminating a particular debt makes your credit report less diverse, it can negatively affect your score. For example, if you pay off an auto loan and are left with only credit cards, your suffers. You ve increased your overall credit utilization
Keeping the overall utilization of your available credit low results in a better score. You should try to only use 30 percent of your total credit across all debts. When you pay off a revolving line of credit or credit card in its entirety and close the account, it decreases the total amount of credit you have available, potentially increasing your remaining utilization rate. You ve lowered the average age of your accounts
The longer your accounts have been open and in good standing, the better. Having a 20-year old account on your report is a good sign, even if you don’t use it. Closing that account and being left with accounts no more than five years old dramatically reduces the average age of your accounts. What to do to increase your credit score after paying off a loan
FICO scores are determined by five categories: payment history (35 percent), credit utilization/amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent) and new credit (10 percent). To increase your score after paying off a debt, you will need to know how that debt played into your overall score. Maintain a positive payment history
Your credit score is heavily influenced by how often you make on-time payments on your accounts. Missing payments or defaulting on loans will quickly tank your score. Paying off your debt shouldn’t affect this aspect of your credit score. But if you deliberately miss payments in order to keep an account open longer and avoid other negative effects of paying off debt, your credit score will suffer. It’s better to pay off a debt and take a small hit to your score than to purposefully avoid closing an account. That will only cause more financial strain in the end. Diversify your credit portfolio
(like , student loans and mortgages) have a set repayment period. Credit card debt is considered revolving debt since the total amount of debt changes from month to month. Installment loans don’t impact your score as heavily as revolving debts like credit cards and lines of credit because of the 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 and don’t have any other installment loans, you might actually see that your credit score dropped because you now have only revolving debt. Reduce your credit utilization ratio
Your credit utilization ratio is calculated by dividing the balances you carry by your total credit limit across all of your cards. Having small balances will help keep your credit utilization ratio in the sweet spot between 10 percent and 30 percent. You can charge less each month or request a credit limit increase. Both should help improve your credit score. Apply for new credit
When you close a loan or pay off a credit card, taking on new debt may actually improve your credit score. As long as it increases your total pool of credit — which decreases your total credit utilization ratio — or diversifies your portfolio, new debt could increase your credit score. However, won’t help if the debt you had was older. A new account won’t bring you any wins with credit history length. Next steps
is rarely the wrong decision, 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. Frequently asked questions
How long does it take for my credit score to update after paying off debt
It can often take as long as one to two months for debt payment information to be reflected on your credit score. This has to do with both the timing of credit card and loan billing cycles and the monthly reporting process followed by lenders. However, the impact of the debt payment on your credit score may not necessarily be significant.
Does paying off collections improve your credit score
may or may not help your credit score. The impact depends on a variety of factors, including the credit-scoring model being used. Older credit-scoring models will reflect that a collection account has been paid and now has zero balance, which can positively impact your score, says Madison Block of American Consumer Credit Counseling. Newer credit-scoring models, however, will ignore the zero-balance status on a collections account.The total number of accounts you have in collections also factors into your credit score. “If the collection event is recent and is the only one of its kind, then it may be advantageous to your score to resolve it,” said John Cabell, director of banking and payments intelligence for J.D. Power. However, if you have many debts in collections, then you may not see much improvement. Conversely, if the collection event is several years old, it may not actually be playing much of a role in your credit score anymore anyway. SHARE: Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Related Articles