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Why Did My Credit Score Drop After Paying Off Debt?

Paying off debt might not translate into a higher credit score. But it can position you to get and keep one.
Feb. 5, 2019
Credit Score, Personal Finance
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Making a final debt payment can feel freeing, but it might actually damage your credit score.

To understand why paying off your debt won’t necessarily bump up your score, it’s important to understand the factors that make up your credit score.

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Before you take action, use our credit score simulator to see how financial decisions may impact your score. Get your actual credit score, too.

Why did my score drop even though I paid off all my debt?

Nothing affects your score more than paying on time.

The second-most-important factor, credit utilization — the percentage of your credit limit that you are currently using — is one reason your credit score could drop a little after you pay off your debt. Having low credit utilization (30% or less) is good; having no credit utilization may be harmful to your score.

Credit utilization is one reason your credit score could drop a little after you pay off your debt.

Paying off an installment loan, like a car loan or student loan, can help your finances but might ding your score. That’s because it typically results in fewer accounts. (That’s not a reason not to do it!)

Age of your credit accounts, whether you’ve recently applied for credit and what kinds of credit you have also affect your score. But paying on time and credit utilization are weighted much more heavily.

What’s the best way to pay off debt and raise my credit score?

Credit utilization is calculated both on a per-card and overall basis. If you have any credit cards, for instance, that are charged up to anywhere close to their limits, make it a priority to lower your balance(s) to no more than 30% of your limit — and lower is better.

Here are other habits to keep in mind:

  • Pay on time, every time. Late payments can seriously damage credit.
  • Keep credit cards open. That is, unless you have a compelling reason for closing them, such as an annual fee or poor customer service. When you close an account, it can reduce your average account age and your available credit.
  • Use credit lightly. If you no longer love the card, consider putting a small, recurring charge on it, and putting it on autopay so that the issuer won’t close the card because of inactivity.

How do I keep my credit score from dropping?

Once you’ve gotten your balances to zero, here’s how to guard your credit.

Make it easier to pay on time. Set up reminders to pay bills. You can set up calendar reminders, or get emails or text alerts from most issuers.

Watch for credit report errors. Any attempt to build your credit will be fruitless if the data going into your scores is wrong.

You can get free credit report information two ways: Some personal finance websites, including NerdWallet, offer report information on demand, and once a year you’re entitled to a free report directly from each of the three credit bureaus.

You can set up calendar reminders, or get emails or text alerts from most issuers.

The reports you can get annually from the credit bureaus can run to dozens of pages. To make sure they’re accurate, follow our guide to reading credit reports.

If you see an error, dispute it. Someone else’s file mixed up with yours or identity theft could potentially — and unfairly — hurt your score, and the sooner you address that, the better.

Don’t apply for multiple credit products in a short time. Opening new credit lowers the average age of your credit accounts and involves a “hard inquiry,” which can result in a small, temporary drop in your score. If you can, wait at least six months between credit applications.

Practice patience. Sometimes the best thing you can do for your credit is wait. A combination of patience and good habits will help any credit score bounce back. Most credit missteps fall off your credit records in seven years.

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