Why Did My Credit Score Drop When I Paid Off A Loan?

The goal of all debt is to pay it off and be done with it. But did you know that paying off a loan or credit card can actually hurt your credit score?

When you have finally reached the end of a loan repayment you are certainly feeling celebratory, and you should! It’s always good to get rid of debt and take a payment off of your plate. So it seems counterintuitive that paying off a loan or closing a credit card can actually make your score drop significantly. 

Why does this happen? Why does eliminating debt hurt your score?

Your credit score is made up of a bunch of different factors that can be affected by the closing of a card or the paying off of a loan. 

Average Age Of Credit

The longer a line of credit has been open the better for your credit score. On your credit report the average age of all of your loans and credit cards is calculated and factors into your score. If you pay off a longstanding loan or close a card you have had for a while, that will change the average to a smaller number, which will drop your score.

Credit Variation

Another aspect of your credit score is the variety of credit you have. It is seen as positive if you have a good variety of different types of credit. If you pay off a loan or close a credit card you may decrease the variety in your report which will make your score drop.

Credit Utilization

A huge factor in determining your credit score is your credit utilization ratio. It is best to have a low ratio, under 30 percent. If you close a credit card you are taking away that available credit from the ration which will make the percentage climb.

Conclusion

Don’t let this make you avoid paying off a loan! Your credit will rebound in time. One thing to take away from this is that you shouldn’t cancel a credit card and you should be surprised to see your credit score fall once that last payment is made.

Fixing your credit can be as simple as making a call! We're here to help you rebuild and understand your credit. Give us a call to get started or learn more about what we can do for you 1-800-431-0449.