Paying down your credit card debt is a huge win for your finances, but you might see your credit score go down even after you lower your balance. While this can be confusing, the drop is often due to other factors, like the types of credit you have and the length of your credit history.
Read on to learn why your credit score may have dropped after paying off debt and how you can boost it.
Why Your Credit Score May Drop When a Credit Card Balance Decreased
While you might expect your credit score to go up after paying off debt, there are a few reasons why it could dip instead.
Worst case scenario: If someone uses your personal information to open a new credit account, or makes charges on your cards without your approval, your credit score may take a hit. The longer the fraud goes unnoticed, the harder it becomes to fix the issue.
More likely, closing your account after paying off a credit card balance can affect your credit score. This changes the overall picture of your credit usage and history, which might cause a small, temporary drop.
Remember that credit scores can fluctuate for many reasons, and a drop isn’t always a bad sign. You can keep track of your score with credit score monitoring.
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Credit Score Factors
Let’s dive deeper into the factors that can affect your credit score. We’re focusing on the FICO credit scoring model, which most lenders use to make their decisions.
Payment History
A history of on-time payments has the biggest impact on your credit score, making up 35% of it. If you’ve recently missed a payment or two, your credit score might be negatively affected. On the flip side, staying on top of due dates, whether with a money tracker app or a calendar, can help you keep your credit score healthy.
Credit Utilization
Paying off your credit card balance and then closing the account could cause your credit score to drop. That’s because it increases the percentage of credit you’re using compared to the total amount available — also known as credit utilization. Lenders typically want you to have a credit utilization ratio under 30%. If yours is higher than that, rest assured there are ways to lower your credit card utilization.
Length of Your Credit History
Length of credit history refers to the average amount of time your credit accounts have been open. In general, the longer your credit history, the better your credit score may be. Closing a credit card account, especially one you’ve had for a long time, can bring that average down, and you may see a drop in your credit score as a result. So think carefully before you decide to close an account.
Credit Mix
Paying off certain types of debt might also lower your credit score because it reduces the variety of your credit types. Lenders like to see that you can responsibly handle different kinds of debt, such as installment loans and mortgages. When you pay off a car loan or other type of debt, it can decrease the diversity of your credit mix, which could lead to a drop in your credit score.
If you paid off both your credit card debt and a loan simultaneously, this might explain the drop in your score. Also, if you closed the credit card account after repayment, your credit mix may be impacted.
New Credit Card Applications
When you apply for a new line of credit, like an auto loan or credit card, the issuer usually performs a hard inquiry on your credit report, which can temporarily lower your score. Lenders check your credit to see if you’re a responsible borrower. Even requesting a credit line increase on an existing card can trigger a hard inquiry.
A soft inquiry is different. It just means you or another company looked at your report, but it doesn’t impact your score. If you’ve recently applied for credit, that hard inquiry could be the reason for the dip. It can be helpful to learn more about soft credit inquiries vs. hard credit inquiries.
Recommended: 10 Strategies for Building Credit Over Time
How to Pay Off Debt and Help Your Credit Score
To pay off debt and help your credit score, here are a few steps to follow:
• Create a budget. By tracking your income and expenses, you can understand where your money is going. This will help you find ways to save money and put more toward paying off debt. A spending app can help automate budgeting.
• Prioritize debts. Depending on your situation, you may want to focus on paying off high-interest debts first, such as credit cards, while making minimum payments on lower-interest debts. Doing so could help you save money on interest in the long run.
• Make regular payments. Consistently pay at least the minimum amount due on all your debts. Whenever possible, pay more than the minimum, which can help reduce your debt faster.
• Consider debt consolidation. If you have multiple high-interest debts, you may want to consider consolidating them into a single loan with a lower interest rate. This can simplify your debt management efforts and potentially reduce overall interest costs.
• Use credit responsibly. Aim to keep your credit utilization ratio below 30% by not maxing out your credit cards.
How Do I Keep My Credit Score From Dropping?
It can take a while to build up your credit, so you’ll want to take steps to protect it. Here are some tips to help you keep your credit score from dropping after you pay off debt:
• Pay your bills on time. Sending bill payments on time is important because it’s such a big part of your credit score. If you need a hand, set up autopayments to make sure your lender or creditor gets your payment on or before the due date.
• Think twice before closing an account. After you pay off a credit card, try not to close it unless you really have to. If you’re worried about spending, you can cut up the card. Keeping older accounts open helps maintain the length of your credit history, which is good for your score.
• Avoid new credit applications. Every time you apply for new credit, it can result in a hard inquiry on your report, which might temporarily lower your score.Try to avoid opening new lines of credit unless you really need to.
• Check your credit report. Regularly check your credit report for any errors or signs of fraud. (There are ways to check your credit score without paying.) If you spot something unusual, be sure to dispute any inaccuracies right away.
How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?
Lenders usually update account activity with the three major credit bureaus — Experian, Equifax, and TransUnion — at the end of the billing cycle. This means it can take 30 to 45 days for any changes to impact your credit report.
It’s a good idea to check your credit report at least once a year. You can get a free report from AnnualCreditReport.com. Remember that checking your credit report and score won’t hurt your credit score.
Ways to Increase Your Credit Score After Paying Off a Loan
To help give your credit score a boost after paying off debt, stay on top of your other credit accounts by paying bills on time and using credit wisely. For example, if you have a credit card, use it for small purchases like gas or groceries, and pay off the balance each month. It proves to lenders that you can manage credit well.
Also try to keep the amount of credit you’re using low compared to your total credit limit. Remember, creditors usually like to see a ratio below 30%. This means using less than 30% of your available credit. Paying off smaller debts may help improve your overall debt-to-income ratio.
How to Get Credit Score Monitoring
Credit monitoring can help you keep an eye on your accounts and catch issues early. It tracks your accounts and alerts you to any unusual activity so you can address problems right away.
Many financial companies offer free credit monitoring, so it’s a good idea to contact your bank or credit card to see if you qualify. If you’ve been part of a data breach, you might get credit monitoring for free. Otherwise, you can sign up for it yourself, typically for a monthly fee of $10 to $30. Alternatively, you can take a DIY approach and monitor your credit for free.
Recommended: Why Did My Credit Score Drop After a Dispute?
The Takeaway
After paying off credit card debt, it’s possible to see your credit score dip. While this drop is usually short-lived, it can be due to changes in your credit mix, history length, utilization ratio, or a combination. To boost your score, focus on responsible credit management. Consider strategies like setting up autopay to ensure you make timely payments, and avoid taking on more debt. These habits can help you maintain a strong credit score.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
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FAQ
Why has my credit score gone down when nothing has changed?
Your credit score might change even if everything seems the same. Certain factors like report updates, identity theft, variations in credit usage, and new information from creditors can impact your score. By regularly reviewing your credit report, you can catch and address changes and errors.
Is a decrease in credit balance good?
It’s usually best to pay your credit card bill in full instead of carrying a balance, as carrying a balance doesn’t help your credit score. Aim to keep your balances below 30% of your total credit limit to maintain a healthy credit score.
Why is my credit score going down if I pay everything on time?
Even if you pay everything on time, your credit score might still go down because of things like using more of your available credit or applying for new credit. Closing old accounts or having a short credit history can impact your score, too.
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