Highlights:
- 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.
- While in some cases your credit scores may dip slightly from paying off debt, that doesn’t mean you should ever ignore what you owe.
While paying off your debts often helps improve your credit scores, this isn’t always the case. It’s possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt.
However, that doesn’t mean you should ignore what you owe. The benefits of paying your debts are far greater than the drop that you may see in your credit scores, and the negative impact is likely to be temporary.
What elements affect my credit scores?
To better understand why you could see lower credit scores after paying off debt, consider the elements that go into calculating your scores.
Your credit scores are based on information from your credit reports, which are generated by each of the three nationwide consumer reporting agencies (CRAs). The nationwide CRAs — Equifax, TransUnion and Experian — receive information about your lines of credit such as personal loans, credit cards and auto and mortgage loans.
Your credit scores are then calculated based on a formula that determines your creditworthiness, or how likely you are to make your debt payments on time. Credit scores are one factor that lenders may consider when deciding whether to extend credit to you.
There are many formulas used to calculate credit scores. However, most consider the following factors:
- Payment history. Your payment history shows how you have repaid credit in the past. Certain behaviors, such as late or missed payments, can have a negative impact on your scores.
- Length of credit history. Your credit reports track the amount of time your credit accounts have been active. A longer credit history can have a positive effect on your scores.
- Newer lines of credit. Any recent credit accounts you have opened are also taken into consideration when calculating your credit scores.
- Credit mix. Your mix of credit accounts — including loans, credit cards and mortgages — is generally considered when calculating your scores, and a diverse credit portfolio can have a favorable impact.
- Credit utilization ratio. The amount of revolving credit you’re using divided by the total credit available to you is known as your credit utilization ratio and can also have an impact on your scores.
Why might my credit scores drop after paying off debts?
Paying off debt might lower your credit scores if removing the debt affects certain factors such as your credit mix, the length of your credit history or your credit utilization ratio.
For example, paying off your only installment loan, such as an auto loan or mortgage, could negatively impact your credit scores by decreasing the diversity of your credit mix. Creditors like to see that you can responsibly manage different types of debt. Paying off your only line of installment credit reduces your credit mix and may ultimately decrease your credit scores.
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. Additionally, if the account you closed was your oldest line of credit, it could negatively impact the length of your credit history and cause a drop in your scores.
When will my credit scores improve after paying off my debts?
Paying off debt is more likely to help your credit scores than to hurt them. You are likely to see your credit scores improve after paying off debt unless the debt you repaid meets the unique criteria listed above.
How long after paying off debt will my credit scores change?
The three nationwide CRAs generally receive new information from your creditors and lenders every 30 to 45 days. If you’ve recently paid off a debt, it may take more than a month to see any changes in your credit scores.
You can receive free Equifax credit reports with a myEquifax account. You can also get free credit reports annually from the three nationwide consumer reporting agencies - Equifax, TransUnion and Experian - at AnnualCreditReport.com.
Should I always pay off my debt?
While in some cases your credit scores may dip slightly from paying off debt, that doesn’t mean you should ever ignore what you owe.
Generally speaking, the damage to your credit scores that may result from paying off debt is unlikely to be permanent. It’s always a good idea to keep up with your debt payments and repay what you owe. The long-term benefits to your credit scores and the ability to live debt-free are well worth it.
FAQs
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.
Why does my credit score go down when I pay off debt? ›
Credit utilization — the portion of your credit limits that you are currently using — is a significant factor in credit scores. It is one reason your credit score could drop a little after you pay off debt, particularly if you close the account.
How long does it take to rebuild credit after paying off debt? ›
It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.
Why did my credit card limit decrease after I paid it off? ›
Card issuers frequently change credit lines for a variety of reasons, which may or may not have anything to do with the way you handled the account. Lowering credit lines is simply a strategy to mitigate risk, and an issuer may take that action when necessary.
How long does it take for your credit score to go up after paying off a car loan? ›
Whenever you make a major change to your credit history—including paying off a loan—your credit score may drop slightly. If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months.
How fast will my credit score go up if I pay off all debt? ›
The average credit score recovery time after closing an account (for those with poor to fair credit) is three months, according to Bankrate. Making a series of monthly on-time bill payments is the fastest route to improving your score. (Payment history is the most important factor.)
What are the disadvantages of paying off debt? ›
Whether you're paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget. Consider where you'll get the money to pay off your debt — is it being diverted from your retirement savings plan?
Will credit score improve after debt settlement? ›
Summary: Debt settlement remains on your credit report for seven years, but it can take as little as 6-24 months to improve your credit score after settling. This all depends on your credit history and financial circ*mstances.
Why did my credit score drop 100 points after paying off a car? ›
Why credit scores can drop after paying off a loan. Credit scores are calculated using a specific formula 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, credit utilization or average account age.
Will credit score increase after paying off collections? ›
For some credit scoring models, paying off collection accounts may improve credit scores. FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0 credit scoring models penalize unpaid collection accounts. Paying off collection accounts may help improve these scores.
One of the most common reasons for a decreased credit score is a missed payment. Your payment history accounts for 35% of your FICO Score and around 40% of your VantageScore. If you allow a payment to go 30 days past due, the delinquency will be reported to the major credit bureaus, resulting in a credit score drop.
What is a good credit score? ›
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
What is a good credit limit? ›
If you're just starting out, a good credit limit for your first card might be around $1,000. If you have built up a solid credit history, a steady income and a good credit score, your credit limit may increase to $5,000 or $10,000 or more — plenty of credit to ensure you can purchase big ticket items.
How long does it take for credit score to recover after paying off credit card? ›
How long after paying off debt will my credit scores change? The three nationwide CRAs generally receive new information from your creditors and lenders every 30 to 45 days. If you've recently paid off a debt, it may take more than a month to see any changes in your credit scores.
What happens if I pay off all my debt at once? ›
Paying your entire debt by the due date spares you from interest charges on your balance. Paying off your credit card debt in full also helps keep a lower credit utilization ratio, which measures the amount of your available revolving credit you're using.
How to build credit after paying off debt? ›
8 ways to help rebuild credit
- Review your credit reports. ...
- Pay your bills on time. ...
- Catch up on overdue bills. ...
- Become an authorized user. ...
- Consider a secured credit card. ...
- Keep some of your credit available. ...
- Only apply for credit you need. ...
- Stay on top of your progress.
For some credit scoring models, paying off collection accounts may improve credit scores. FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0 credit scoring models penalize unpaid collection accounts. Paying off collection accounts may help improve these scores.
Is it better to pay a debt in full or settle? ›
If you can afford to pay off a debt, it is generally a much better solution than settling because your credit score will improve, not decline. A better credit score can lead to more opportunities to get loans with better rates.
How can I raise my credit score 100 points in 30 days? ›
For most people, increasing a credit score by 100 points in a month isn't going to happen. But if you pay your bills on time, eliminate your consumer debt, don't run large balances on your cards and maintain a mix of both consumer and secured borrowing, an increase in your credit could happen within months.
How to get 800 credit score? ›
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.
