Why Did My Credit Score Drop After Paying Off Debt?

Michael Collins
May 04, 2021

Did your credit score drop after paying off debt? Shouldn’t paying off debt be a good thing and not hurt your credit score? Well, credit scores are complicated and knowing why your credit score goes up or down can be confusing. Read on and we will clear some of the air for you! 

Why Did My Credit Score Drop After Paying Off Debt?

Your credit score dropping after paying off debt really boils down to one reason: closing your accounts. Put simply, closing your accounts lowers the average age of all your open accounts and lessens the diversity of your “credit mix.” Let’s dive deeper into both of these two factors. 

No one likes to have debt. Debt can feel like a dark cloud hanging over you that causes you to stress and worry about it until it disappears. On the other hand, paying off this debt is a great feeling. Successfully paying off debt is an accomplishment and you should be proud of yourself any time that you do it.

However, if paying off debt is such a good thing, why does your credit score sometimes drop after you pay off a loan? Shouldn’t credit bureaus and lenders want to see that you can be trusted to pay off your debts? The answer to this is a little more complicated, so let's dive right into it.

Average Age of Your Accounts

Your FICO credit score is made up of five different factors, each with a varying level of importance to your score. These five credit scoring factors are your payment history, your credit utilization, the length of your credit history, your credit mix, and your new credit. 

Of these five factors, your payment history is the most important. Your payment history makes up 35% of your entire credit score, which means that any missed payments or changes to your payment history will have a more sizable effect than most other changes. 

Your payment history consists of the record of past payments you've made on any open loan or credit account in the last 7-10 years. With your payment history, lenders have an opportunity to see how well you can pay back your loans and credit cards and whether you should be trusted with more debt in the future. 

If you have many accounts with over 7-10 years of good payments, the credit bureaus will smile heavily upon you. They will see that the average age of your accounts is very high and that these accounts have a history of good payments on them. 

However, once you close one of these accounts the average age of your accounts could go down. Instead of your average age of accounts being something like 7 years, it might get lowered to 5. This obviously makes you look slightly less trustworthy and your credit score will reflect that as a result. 

Credit Mix

Your credit mix is essentially the sum of all debt accounts you have open. Lenders and credit bureaus want to see this mix be as diverse as it possibly can as it shows that you have the capability to deal with different kinds of debt at once. For example, a loan lender might not want to see that your credit mix is only made up of credit cards. This might alert them that you are only comfortable with paying off credit cards and may not be prepared to take on a big loan. On the other hand, lenders and credit bureaus will like if your credit mix consists of a balanced blend of loans and credit cards. 

Your credit mix only makes up 10% of your total FICO score. While this is not nearly as important as some of the other factors, it still plays a big role in your score. Any change to your credit mix could see your credit score drop a few points. 

If your credit score dropped after paying off debt, it may have been due to a change in your overall credit mix. For example, if you have one credit card account and four loan accounts and you close your one credit card account, your credit mix will look a lot less diverse. This will in turn cause your credit score to decrease. 

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Other Reasons Your Score Might Have Dropped

While the average age of your accounts and your credit mix night are responsible for your credit score dropping after you've paid off debt, they may not be the sole cause. There is a chance that there may be some other coincidences to your account that happened close to when you paid off your debt. Let’s look at these other reasons why your score may have dropped. 

Hard Inquiries 

Most times you apply for a credit card or a loan, your lender wants to look at your credit score and your credit history. To do this, they do something called a “hard inquiry,” which essentially means the lender did a pull on your credit information. While these may seem like something small, hard inquiries can actually hurt your score. 

For whatever reason, most times you apply for a loan or credit card and a hard inquiry is done on your account. Your score can drop 5-10 points. These hard inquiries can last many months on your account as well. This means that if you have applied for 6 credit cards in the last 3 months, your score could drop as much as 60 points! 

If you are frequently applying for new credit cards and loans but you do not check your credit score often, you might find that your score has dropped since you last checked. While this could be due to you closing your accounts after you’ve paid off your debts, it may also be due to getting too many hard inquiries on your account. 

Errors on Account 

Unfortunately, there can oftentimes be errors on your credit report that are causing your credit score to take a hit. Whether it is the lender’s fault or the fault of the credit bureaus, your score could unnecessarily be lower than it should be. Lenders and credit bureaus aren’t perfect and mistakes on accounts are actually more common than you may think. 

Errors on accounts can be from a variety of things. For example, your lender may have reported one of your payments as a late payment even though you made it on time. Your credit bureau may be reporting that one of your accounts is delinquent even though you have paid off the balance. Whatever the reason, one of these mistakes could be wrongly impacting your credit score. 

Since you’ve last checked your credit score, there may have been an error added to your account that does not belong there. This may have coincided with you paying off your credit card debt. To write this wrong, contact your lender or your credit bureau to dispute these inaccuracies. If you can provide that the information they are showing is wrong, you could see your credit score get a boost

How Paid-Off Loans Affect Your Credit Score

While it may seem like paying off your debt always leads to your credit score dropping, this is not the case. You should always strive to pay off all of your debt at any time, as having outstanding debt can be both stressful and expensive. 

Recall that paid-off loans and credit cards do not immediately hurt your credit score. In fact, they can actually help your credit score. It is only when you close these accounts that your credit score might take a hit. 

Paying off your loans and credit scores is always a good thing. Paying off your loans and credit card balances plays into your payment history which we covered earlier. Lenders want to see that you are consistently paying off any sort of debt that you get. If they see this, they will be convinced that you can be trusted with your money. Otherwise, there is no way of them knowing if you can be trusted to fully pay back anything you owe. 

How Long Does It Take For My Credit Score To Update?

Are you wanting to apply for a loan or credit card but are worried that you recently closed an account and it might hurt your score? 

If you closed an account yesterday and you are trying to get a credit card today, your credit score will likely not have changed yet. Credit scores are not updated automatically, as lenders are often only reporting information at the end of months and the credit bureaus need time to update every person’s information. 

Once there has been a change to your credit information, like you paying off debt and closing an account, your score will take a month or two to update. Keep this in mind when you are thinking of closing an account. 

How to Keep My Credit Score from Dropping

While not closing your accounts after you've paid off debt is one way to stop your score from dropping, it is not the only way. There are a variety of ways to not only prevent your credit score from dropping but instead actually increase it at the same time! Let’s look at two of the best ways; budgeting and automatic payments.


Going back to what impacts your credit score the most, your payment history has the heaviest weight on your score. As such, improving this can help to boost your score the most. Making payments month in and month out is the best way to do this. 

If you are tight on cash or are in a difficult financial situation, you may find yourself running out of money every month to make payments on your bills, loans, and credit cards. When you are forced to miss a loan or credit card payment because of a lack of cash, you will see your credit score drop. If this continues to happen, you are more than likely to end up with a bad credit score. One way to ensure that you have enough money at the end of month to prevent this is by utilizing budgeting apps.  

Budgeting allows you to take a good, hard look at what exactly you spend your money on. There’s a chance that you are spending too much money on some things and that you can cut down spending in these areas. Maybe you spent too much money on food delivery last month when you should have been cooking at home. Maybe you spent too much money on movie dates when you could have watched one at home. Budgeting can not only help you see what areas you can cut down on spending in, but it can also help you stay within the limits of your budget with alerts and notifications. 

Since missing your payments is one of the worst things you can do to your credit, it’s important to know how you can prevent this. Budgeting your monthly costs out and being more aware of your credit card balance can help you have enough money to pay those bills at the end of the month!

Automatic Payments

Let’s face it, it can be difficult to balance all of your various payments. With bills, credit cards, loans, utilities, and other expenses you need to worry about every month, it can be difficult to remember when you need to make all of these payments. Setting up automatic payments can help to fix this issue.

Some credit and loan lenders allow you to automatically make payments to them right out of your bank account. Setting up these automatic payments, such as a monthly payment towards a car loan, can be a great way to remove the stress of deadlines to make payments. If you simply have enough money in your bank account at the end of the month, the payment will be automatic, and you do not run the risk of missing your payments! 

However, there is a chance that these automatic payments can overdraft your account, which can cost some money in fees. Even if payments are automatic, you should still be diligent in keeping an eye on your account balance to prevent overdrafts from happening.

Be aware of your current financial standing at any point, and use budgeting to make sure you don't run out of money to make these automatic payments. See if your lender offers this to you on your loan or credit card account. 

Michael Collins

Michael has a passion for writing and brought that passion to Possible. He enjoys reading everything there is to know about film, sports, and finance. His studies in college have allowed him to be on the forefront of business knowledge so he can better inform his readers.

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