Did Your Credit Score Drop After Paying Off a Debt? Here's Why (2024)

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Did Your Credit Score Drop After Paying Off a Debt? Here's Why? ›

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

If you take out a loan to consolidate debt, you could see a temporary drop because of the hard inquiry for the new loan. Your credit score can take 30 to 60 days to improve after paying off revolving debt. Your score could also drop because of changes to your credit mix and the age of accounts you leave open.

Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.

Bank policies: Changes in a bank's internal policies or priorities can lead to credit limit decreases for some cardmembers. These changes may be driven by factors like the bank's financial health or strategic goals.

They want to see that you can handle short-term credit like a credit card, and a long term loan like a mortgage or car loan. When you pay off your car loan, that long-term data point disappears, and the algorithm considers you to be a higher risk because it can no longer judge how well you manage that sort of credit.

Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.

It could lower the average age of your accounts

If you paid off a car loan, mortgage or other loan and closed it out, that could reduce your age of accounts in VantageScore's calculations. That's also true if you paid off a credit card account and closed it.

Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.

As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.

Why does paying off a credit card lower my score? ›

Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop. This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio.

There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.

Reasons Why Capital One Might Have Lowered Your Credit Limit

If your balance is frequently close to your limit, Capital One may see you as risky, and they're likely to limit how much you can spend – especially if other aspects of your credit profile seem shaky.

You paid off a loan

Paying off something like your car loan can actually cause your credit score to fall because it means having one less credit account in your name. Having a mix of credit makes up 10% of your FICO credit score because it's important to show that you can manage different types of debt.

A perfect credit score of 850 is hard to get, but an excellent credit score is more achievable. If you want to get the best credit cards, mortgages and competitive loan rates — which can save you money over time — excellent credit can help you qualify. “Excellent” is the highest tier of credit scores you can have.

For example, when you pay your loan or credit card bills on time, you establish a positive repayment history that will build your credit. On the other hand, making late payments or carrying large credit card balances can damage your credit.

Payment history has the biggest impact on your score, followed by the amounts owed on your debt accounts and the length of your credit history. There are other elements, too, that could affect your credit scores, such as inaccurate information on your credit report.

A forgotten account

Another thing that could be pulling down your score is a long-forgotten account. Is there a card somewhere you no longer use, stuck down the back of the sofa, perhaps? If it's in arrears, even by a small amount, this could be hurting you. Take a moment to ensure you're on top of all your accounts.

Debt settlement will remain on your credit report for seven years. This means that for those seven years, your settled accounts will affect your creditworthiness. Lenders usually look at your recent payment history.