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Why Did My Credit Score Drop After Paying Off My Debt?

Paying off debt is always a good idea, but it may lower your credit score temporarily.

credit card debt
Updated February 4, 2025
Written by Rachel Alulis
Here at MoneyFor, our goal is to help you make informed financial decisions. We are committed to accuracy and impartiality in all our content. It’s important to note that articles may reference products from our partners who compensate us. This influences which products we feature and their presentation on our site, not our evaluation.

Key takeaways

  • Paying off debt is a healthy financial decision, but it can cause a temporary credit score dip.
  • Your score may drop due to changes in your available credit, credit mix, and average account age.
  • To minimize score drops, always pay on time, avoid closing old accounts, and watch your usage.

Paying off debt feels great and is incredibly freeing. You don’t owe any more money. Your finances are in better shape. So why did your credit score drop? 

Scores are calculated using a mix of factors, including the amount used, age, and mix of accounts. When you pay off debt, you may adversely affect these factors. Counterintuitive as it is, paying off debt can cause a – temporary – dip in your score.

What can you do about it? Pay off debt smartly and build your score back up. Good debt management will serve you well in the long run.

Jump to:

Why does paying off debt hurt credit?

You owe money. You repay your creditors. It seems logical that your score would go up. Unfortunately, this often is not the case. 

Why does your credit score go down when you pay off debt? It has to do with how your score is calculated.

Credit scores are made up of these five factors:

  • Payment history – 35%
  • Amount used – 30%
  • Length of credit history – 15%
  • Credit mix – 10%
  • New inquiries – 10%

When you pay off debt, you can actually negatively impact a few factors, namely, your credit usage, length of credit history, and mix of accounts.

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Your credit utilization rate went up

Your credit utilization ratio is the amount you spend compared to your credit limit. For a good score, your utilization ratio should be less than 30% – 10% is better, but keep it above zero.

If you paid off your credit card and your score dropped, it could be because your utilization ratio went up. This can happen if you close the account.

Say you have two cards. One has a $5,000 credit limit, and the other has a $10,000 limit. You have an outstanding balance of $4,500 across both cards. Your credit utilization is 30%. That’s good. Now, you pay off the $5,000 limit card and close it. You still owe $4,000 on the $10,000 limit card. Your utilization jumps to 40% – higher than recommended.

It’s often better to keep old accounts open.

It lowered the average age of your accounts

Lenders prefer longer credit histories because they give them more data to work with. Closing an older account may lower the average age of your accounts and, therefore, your score.

For example, say you have three credit cards. One has been open for two years, the other for eight, and the third for eleven years. Your average age is seven. If you close the oldest account, your average age drops to five.

The good news is that FICO – the most commonly used credit scoring model – continues to include the age of your oldest account for up to ten years. VantageScore does not. Since you don’t know which score a lender will use, avoid closing accounts.

You have fewer types of credit accounts

Your score benefits from a mix of account types. This means both installment (personal loans, mortgages, auto loans) and revolving credit (credit cards, lines of credit, HELOCs). Having a mix demonstrates that you can manage both types of payments responsibly. 

Suppose you have a few cards and one car loan. You pay off your loan as agreed. Your payment history is perfect, and your card balances are low. But now that your loan is paid off, your credit mix is reduced. Your score may drop even though you repaid your loan precisely as agreed.

That is not to say that you shouldn’t pay off a loan. It is much better to pay what you owe and have a less diverse credit profile. Your mix only makes up 10% of your FICO score – it’s not a big deal.

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How to pay off debt and build credit

Debt payoff and credit building go hand in hand. Responsibly repay what you owe, and you’ll help your score.

Pay on time, every time

Payment history is the most significant credit scoring factor. Making timely debt payments increases your score, whereas late or missed payments seriously damage it.

Use credit responsibly

Do not take out loans you don’t need. Don’t charge anything you can’t afford to pay for in cash. Make payments on time. Pay your balances in full each month.

Take a holistic view of loans

A loan is designed to be repaid within a specific period of time. The best thing you can do for your overall financial health is to repay the money as agreed. It’s true your credit score may go down after paying off a loan, but it will help in the long run. Keeping a loan open to avoid a temporary score drop means paying unnecessary interest.

How long does it take for your credit score to go up after paying off debt?

The time it takes for your credit score to improve after paying off debt depends on why your score dropped. Say you paid off credit card debt. You leave accounts open, stay under a 30% utilization rate, and keep up with monthly payments. Your score can rebound in as little as one to two months. If you miss a payment or close the account, your score will take longer to recover.

Now, let’s imagine you paid off your car loan, but it was your only installment loan. Your score will likely drop 10 to 40 points. Use your credit cards responsibly; your score should rebound within six to eight months.

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Pay debts wisely!

Or your credit score may suffer.

How you pay off the debt can impact your score

How you pay off debt matters. Debt relief is a wonderful tool, but it can impact your score in different ways. 

Debt consolidation: Taking out a debt consolidation loan or applying for a balance transfer card will cause your score to drop – at first. There’s the hard inquiry, and if you close old accounts, you’ll affect your utilization ratio and average age. Overall, consolidation improves scores. Debt consolidation makes it easier to pay on time and reduces your utilization. If you use a loan to consolidate credit card debt, you’ll increase your mix.

Debt management plans (DMPs): Initially, you may experience a slight drop because credit card issuers often require you to close accounts and will note your enrollment in a DMP on your credit report. Your score will improve as you pay on time and reduce your overall debt. The long-term benefits typically outweigh the short-term dip.

Debt settlement: Settling a debt has an overall negative impact on your score. For settlement to work you must be very behind on payments. Missed payments do severe damage. The major credit bureaus will mark your accounts as “settled for less,” which lenders do not look kindly on.

Bankruptcy: Declaring bankruptcy is a last resort. Scores drop anywhere from 75 to 200 points when you file. The good news is that nothing is permanent.

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Tips to raise your rating

Building credit is very doable, but it takes time. On the bright side, the lower your score, the bigger the initial jumps you’ll see.

Pay on time and in full every month

Make on-time payments, and your score will thank you.

If you’re afraid of missing a payment, call your creditor and ask for an extension. If you’re forgetful, set up automatic payments or put in calendar reminders. Whatever you do, never miss a due date.

Watch for credit report errors

Regularly review your credit reports from all three major bureaus to find out why your credit score dropped. Get it for free from annualcreditreport.com. Look for any mistakes, outdated information, or suspicious activity. Dispute any inaccuracies you find with the issuing bureau. Getting an error off your credit report can instantly boost your score.

Keep a low credit utilization ratio

Watch your spending and pay your balances in full every month. It’s the best way to keep your spending under 30%.

Another trick is to make multiple payments throughout the month. Your creditor only reports how much you’ve spent at the end of the billing cycle.

Avoid closing old credit card accounts

Maintain active accounts. Put a small recurring charge on the card and set up autopay. You get the benefits of an older account without worrying about it.

The exception is if the card has fees. In that case, it may be smart to close it and take the hit.

Limit new inquiries

Every time you apply for a new loan or card, the lender does a hard credit check. Hard inquiries lower your score by five to ten points. One isn’t a big deal, but a lot within a short period can do damage. 

Wait at least six months between credit applications. Do your research and only apply if you qualify.

Try to prequalify or seek pre-approval. You’ll see your chances of approval with only a soft inquiry – no damage to your score.

Potentially diversify your portfolio

Having a mix of accounts shows lenders you can manage different types of debt. Do not take on debt you cannot afford. You can achieve an excellent score without a mix.

Frequently asked questions

1. Why didn’t my credit score go up after paying off debt?

Your score didn’t go up because you paid off your only installment loan reducing your mix or accounts. Or if you paid off cards and your score went down, it’s likely you closed the account.

2. Why did my credit score drop 80 points for no reason?

It may feel like your credit score dropped for no reason, but there’s always a reason. Check your credit reports to find out why. It could be due to account closures, higher balances, or identity theft.

3. Why did my credit score drop 40 points after paying off debt?

Score drops frequently happen when an account is closed. A closed account will reduce your average age, increase your utilization, and may lower your account mix.

4. Why does higher credit utilization decrease your credit score?

A higher credit utilization rate signals to lenders that you may be over-reliant on credit. Being dependent on borrowing means you are high risk – less likely to repay what you owe.

5. Why did my credit score go down when I paid off my car?

Your credit score may drop after paying off your car or any loan because it removes an installment account from your credit mix. You now have a less diverse profile, and your average age of accounts is shorter.

Bottom line

Paying off debt is an excellent step toward good financial health. The less debt you have, the less interest you pay and the more money you have in your pocket each month. It’s disheartening that paying off an account can actually hurt your score.

Do not get stuck on this temporary score drop. The drop should be slight and easily corrected. The best thing you can do is pay off debt smartly and maintain good credit habits. Pay bills on time, keep accounts open and active, and keep your utilization low. Your score will rebound in no time.

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About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

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