Does your credit score go down when you pay off a loan? If paying off your loan affects certain factors on your credit score, then your credit score will go down once that loan is paid off. These factors could be your credit utilization ratio, credit mix, or the length of your credit. But the effect on your credit score will be temporary.
Your credit score does not decrease every time you pay off your loan. It will all depend on the type of loan you paid off and the impact of that credit account on your credit score. If you just paid off your credit card debt, your credit score will increase instead of dropping. This is because credit cards are a form of revolving credit, meaning they get renewed and stay active even after paying off your balance. Paying off your credit card debt automatically boosts your credit score due to improved credit utilization.
But, if you just paid off your mortgage or car loan, your credit score could drop in the short term. This is because these loans are installment loans, and once paid off, the account gets closed and becomes inactive. Paying off an installment loan can lead to weakening your credit mix and the age of your credit. Hence lowering your credit score.
Does my credit score go up when I pay off a loan?
Is it possible that your credit score can go up when you pay off your loan?
Paying off your loan is always good, whether directly impacting your credit score. Every time you pay off a loan, you automatically improve your creditworthiness and improve your credit.
But, the level of impact will depend on the type of loan you paid off. For example, installment loans such as mortgages and car loans are not renewed when you pay them off. This means the account is no longer active once they are paid off. Since your credit mix directly affects your credit score, paying off an installment loan can temporarily lower your credit score. In other words, if paying off your loan weakens your credit mix and or reduces the age of your credit, your credit score might go down.
Then again, it is essential to understand that your credit score is directly affected by the debt you carry. Too much debt weakens your debt-to-income (DTI) ratio, making you a risky borrower. Carrying too much debt lowers your credit score. For this reason, paying off your loan will positively impact your credit despite a short-term decrease.
If you just paid off your revolving credit, such as credit card debt, your score might go up. The account stays open and active when your credit card debt is paid off. This keeps your credit mix intact even if the balance on your credit card is zero. Having zero balance on your credit card directly improves your credit utilization, one of the most significant factors affecting your credit score. Your credit utilization affects 30% of your FICO score and 20% of your VantageScore. For this reason, bringing your credit card balance to $0 or close to zero will boost your credit score.
Why is my credit score decreasing when I pay for everything on time?
Does your credit score keep dropping even if you pay your bills on time? Paying every bill on time does not prevent your score from dropping. Here are a few reasons your score keeps dropping even if you pay your bills on time.
Your credit utilization is increasing, or you are carrying a high balance on credit cards.
Some of the reasons your credit score is going down even if you pay your bills on time could be due to carrying a large balance or recent account activities. For example, if you have a higher credit utilization on your credit cards, your credit score could still drop even if you consistently pay your minimum payments on time.
This is because credit utilization is one of the highest factors in your credit score. So, as long as your credit utilization ratio increases, your credit score will go lower regardless of whether you make on-time payments.
You recently applied for a loan.
Your credit score could also decrease due to having hard inquiries on your credit reports from a recent loan, a mortgage, or a personal loan application. The lender will check your credit reports to get approved for these loans, resulting in a hard inquiry on your credit report. Each hard inquiry will lower your credit score by 5 to 6 points. In some cases, the impact of a hard inquiry on your credit score could be minimal, or your score can drop as many as 10 points.
You paid off a loan
If you make payments on time but your score keeps dropping, it is possible that you just paid off one of your loans. Paying off your loan can lower your credit score. This happens when the loan you just paid off affects your credit mix. A good credit mix should include installment accounts such as car loans and mortgages and revolving credit such as credit cards. If paying off your loan affected your credit mix, it could justify why your credit score went down.
There are errors or fraudulent activities in your credit reports
One of the most effective ways to maintain a clean credit history is to review your credit reports regularly. If you pay your bills on time and your score keeps dropping, there might be an error in your credit reports.
For example, someone can steal your identity, open a new account in your name, or use some of your credit limits without knowing it. Even if you did not do any of these, these activities will still be reported on your credit reports. Hence affecting your score. To check for an issue in your report, get a free copy of your credit reports and review them. Shoudl, do you find errors, inaccuracies, or fraudulent activities in your reports? Dispute them by submitting a formal dispute letter to credit bureaus and your creditors.
Is it a good idea to pay off a loan early?
Paying off your loan early will help you save money due to fewer interest payments. In addition, paying off your loan could boost your credit score as your DTI ratio improves due to lower debt balance and on-time payments. Furthermore, paying off your loan early will protect you from default risks.
But, depending on the loan you paid off, you might miss out on high-yield investments. For example, if you have a mortgage with a low rate, you could invest that extra cash in high-return investments instead of having hundreds of thousands of dollars in equity sitting in your house. As long as you will be earning way more than the interest rate on your mortgage, it will make sense to invest the money and pay off the house slowly.
If you have a high-interest loan, such as a credit card or personal loan, forget about investing and paying off as quickly as possible. This is because it is almost impossible to find an investment that yields 20+% APY you get charged on these loans. In addition, some of these loans are harder to pay off due to compounding interest.
Does my credit score go down when I check it?
No. Checking your credit score does not lower it. Every time you check your credit score, it results in a soft inquiry, which does not impact your credit score.
When you are applying for a loan, and your lender requests to view your credit profile, your credit score will drop due to a hard inquiry on your credit report. Each hard inquiry drops your credit score by 5-6 points on average and stays on your credit reports for 24 months.
Related: Does my credit score go down when I check it?
How long after paying off a personal loan does a credit score improve?
Will paying off debt improve your credit? Yes. How long will it take to improve your score after paying off debt? Typically, it takes 30 to 60 days after paying off a loan for your credit score to improve. The number of points you gain, however, depends on many factors, including your credit utilization, the age of your credit, and your remaining credit mix.
For example, if you paid off a credit card, the effect on your credit score will be fast. This is because your credit utilization rate will be lower once your payment once payment is updated on your credit reports. An improved credit utilization will boost your credit score.
You should also keep your credit account open to ensure that you maintain a good credit mix and the age of your credit.
On the other hand, if you pay off an installment loan, such as a car loan, your credit score might go lower in the short term before going up again. This is because having a good credit mix is essential to improving your credit score. So, paying off an installment loan will end up closing the account, which might affect your credit mix and lower your credit score.
If you make your payments on time and manage the remaining accounts well, your credit score should rebound quickly.
Does my credit score go down when I close a credit card?
Paying off a credit card might not lower your credit score. But, closing a credit card could lower your credit score. It will all depend on the nature of the remaining accounts and the impact of that credit card on your credit profile. If closing that credit card will weaken your credit mix or result in higher credit utilization on remaining accounts, your credit score will go lower after closing your credit card.
You will be better off by keeping your account open. Instead of closing a credit card account you are not using, put a small monthly payment on the card. Most card issuers close clients’ accounts after many months or years of inactivity. Putting a small recurring bill on the card you don’t use often will prevent your lender from closing the account.
Does my credit score go down when I apply for a credit card?
By default, when you apply for a loan, the lender runs a credit check, resulting in a hard inquiry on your credit report and lowering your credit score. This applies to credit cards as well. So, when you apply for a credit card, the card issuer checks your credit report to evaluate your creditworthiness. This activity results in a hard inquiry on your credit report.
Each hard inquiry drops your score by 5-6 points on average and remains on your credit reports for 2 years. The good news is that hard inquiries do not affect your score after 12 months, and you should gain your points back in a few months after responsible use of your credit accounts.
Does my credit score go down when I apply for a loan?
Your credit score decreases when you apply for a car loan, mortgage, or other loan requiring a credit check. This is because a hard inquiry appears on your credit report when your lender checks your credit reports and views your credit score.
Each hard inquiry lowers your credit score by 5 to 6 points. In some instances, the effect on your credit score is minimal. However, it is also possible that a hard inquiry can damage your credit score by as many as 10 points.
A hard inquiry stays on your credit report for 24 months but does not affect your credit score after 12 months. If you pay your bills on time and use your credit accounts responsibly, you should regain your points in a few months.
More on credit scores and credit reports
The following is extra key information about credit scores and credit reports you should know.
How often does my credit score update?
Your credit score changes as new information is updated on your credit reports. Any activities on your credit accounts get reported to major credit reporting agencies, who then update your credit reports. You will frequently see changes in your credit score depending on what was reported. You should expect your score to update every 20 to 60 days. However, it could also update multiple times a month based on when information is received and updated on your credit reports.
How long does it take for a credit report to update?
Credit reports get updated every time your lenders submit your information to credit bureaus. Not all lenders submit your information to all credit bureaus. This causes variations in information on your credit reports and might result in different credit scores and the time your score is updated. Remember that other factors cause variations in your credit score, such as credit scoring models used by each major bureau.
When does your credit score change?
Your credit score changes as new information is added to your credit reports. For example, a late payment will be reported on your credit report if you do not pay your bills on time. Your credit score will then drop to reflect this new information. It usually takes 30 to 45 days for your credit score to change.
Will my credit score go down when I check it?
Checking your credit score does not lower it. This is because when you check your score, it results in a soft inquiry. Soft inquiries do not affect credit scores. Your credit score only goes down when a lender requests to view your credit report as part of the loan process, as this activity results in a hard inquiry on your credit reports.
How do I get a free copy of my credit report?
You can get a free copy of your annual credit report from https://www.annualcreditreport.com/index.action. Every credit reporting agency (Equifax, TransUnion, and Experian) must give you a free copy of your credit report once every 12 months.
The bottom line
Yes, your credit score can go down when you pay off a loan, but it depends on many factors, including the type of loan you paid off, the impact of that loan on your credit, and the balance of the remaining accounts. Paying off a loan can hurt your credit score, but this is only temporary. Using remaining accounts responsibly and paying your bills on time helps you regain your points in a few months.
In some cases, paying off your debt can directly increase your credit score. For example, paying off a large credit card balance will lower your credit utilization. An improved credit utilization will improve your credit score.
