October 6, 2023

Why your Credit Score may drop after paying off Debt?

Learn how to maintain a healthy credit profile and make the most of the funds you have to streamline your finances.

Have you ever wondered why your Credit Score sometimes goes down even when you've been responsible and paid off your Debts? It can be frustrating, right? In this article, we're going to explain why this happens and help you understand that Credit Scores are not fixed numbers. They can change and be affected by various things, making it important to know why your Credit Score might drop after doing something that’s recommended like paying off Debt.

To make it easier to understand, we'll talk about a few reasons behind this Credit Score mystery. We'll discuss things like when you close old accounts, how the types of credit you have can change, and the timing of when your credit information gets reported. All these factors can come together and cause your Credit Score to drop temporarily, even though you've done the right thing by paying off Debt.

Read more: Score Big in Life: What's the Magic Credit Score?

Why your Credit Score may drop after paying off Debt?

Paying off Debt typically has a positive long-term impact on your Credit Score, as it reduces your overall Debt load and demonstrates responsible financial behavior. However, in the short term, your score may drop slightly due to factors like closed accounts and changes in your credit mix. 

On average, a Credit Score may dip by around 10-20 points after paying off a major Debt, but this can vary depending on individual circumstances. It's important to remember that this dip is usually temporary, and your score should gradually recover as you continue to manage your credit responsibly.

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Understanding Credit Scores

Before delving into the reasons behind Credit Score drops, it is crucial to understand what Credit Scores are and how they work. Credit Scores are numerical representations of your creditworthiness, typically ranging from 300 to 850 in the FICO scoring model. Lenders use these scores to assess the risk of lending money to borrowers. The higher your score, the more creditworthy you appear, making it easier for you to qualify for loans and secure better interest rates.

Your Credit Score is determined by various factors, including:

  • Payment history: The history of your on-time and late payments
  • Credit utilization: The ratio of your Credit Card balances to your credit limits.
  • Length of credit history: The age of your credit accounts
  • Types of credit: The mix of credit accounts you have (Credit Cards, loans, etc.)
  • New credit: Recent credit inquiries and account openings[1]

Now that we've laid the groundwork, let's explore why paying off Debt might not always yield the Credit Score improvements you expect.

Reasons why Paying Off Debt can lead to Credit Score Drops

Let's explore several reasons why paying off Debt can temporarily lower your Credit Scores and how to navigate this paradox in the complex world of credit management.

1. Closed Accounts

When you pay off a Loan or Credit Card balance and subsequently close the account, it can negatively impact your Credit Scores. Closing an account affects your credit utilization ratio, which is a significant factor in determining your Credit Score. This ratio measures the amount of credit you're using compared to the total available credit. A lower credit utilization ratio is generally better for your Credit Score.

Closing an account reduces your available credit, which can increase your credit utilization ratio even if you have a zero balance on the closed account. This can lead to a temporary drop in your Credit Score.

To avoid this, consider keeping the account open, especially if it is your oldest or only credit account. However, some lenders may close accounts that have a zero balance after a period of inactivity, so it is essential to use the card occasionally to keep it open.[2]

2. Mix of Credit Types

Credit scoring models like to see a diverse mix of credit accounts, such as Credit Cards, installment loans, and mortgages, in your credit history. Paying off a specific type of Debt, like a Credit Card or personal loan, might eliminate diversity in your credit profile and, consequently, impact your Credit Scores.

For instance, if you have multiple Credit Cards and decide to pay them all off at once, your credit mix could become more limited. While it is a good financial move to reduce Debt, it could temporarily affect your Credit Scores if you no longer have revolving credit accounts.[2]

3. Age of Accounts

The length of your credit history is another critical factor in your Credit Score. Older accounts generally have a positive impact on your Credit Score, as they demonstrate your ability to manage credit over time.

When you pay off a long-standing Debt and close the associated account, you might lose the positive credit history associated with it. This can lead to a drop in your Credit Scores, especially if the account was one of your oldest.

To mitigate this, consider keeping older accounts open even if you've paid off the balance. Using them occasionally and paying the balance in full each month can help maintain the positive history associated with these accounts.[2]

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4. Credit Inquiries

Paying off Debt can sometimes trigger a credit inquiry, which can temporarily lower your Credit Score. For example, if you pay off an auto loan, the lender may conduct a final credit check to ensure the loan is fully paid in line with the loan agreement terms. While this inquiry typically has a minimal impact on your score, it can still cause a slight drop.

Additionally, if you decide to open new credit accounts after paying off Debt, each application may result in a hard inquiry, which can also lower your Credit Score temporarily. The cumulative impact of multiple inquiries can be more significant, so it is essential to be mindful of how often you apply for new credit.[2]

5. Credit Mix Shift

As you pay off Debt, your credit mix might shift naturally. For example, if you pay off a car loan or a personal loan, you'll have fewer installment loans in your credit profile. This shift can affect your credit mix, potentially impacting your Credit Scores.

While you should focus on paying off high-interest Debt, be aware of how these changes might affect your credit mix and take steps to maintain a healthy balance of credit types in your profile.[2]

6. Scoring Model Changes

Credit scoring models evolve over time, and lenders may update the models they use to assess creditworthiness. When this happens, the way your Credit Score is calculated can change, potentially leading to fluctuations in your score, even if you have not made any significant changes to your credit profile.

If you notice a drop in your Credit Score after paying off Debt, it is possible that the scoring model or algorithms used by a particular lender have been updated. This can lead to different weightings of factors and may affect your score differently than previous models.[2]

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7. Negative Information Remains

Paying off Debt does not erase negative information from your Credit Report. Late payments, collections, or public records like bankruptcies will remain on your Credit Report for a specified period, typically seven to ten years, depending on the type of negative information.

While paying off Debt can have a positive impact on your Credit Score over time, the presence of negative information can continue to weigh down your score until it is removed. In some cases, paying off Debt may lead to an increase in your Credit Score as the negative information becomes older and carries less weight in the scoring calculations.[2]

8. Reduced Credit History

If you have paid off all your Debt and closed most of your credit accounts, you may find yourself with a reduced credit history. While this can be financially liberating, it can also lead to a drop in your Credit Score, especially if you have a limited credit history to begin with.

Lenders prefer to see a longer credit history to assess your creditworthiness accurately. If you have recently paid off all your Debt and closed accounts, you may need to rebuild your credit history over time to see improvements in your Credit Score.[2]

Read More: Is It Better to Pay Off Old Debt or New Debt First?

9. Timing of Credit Reporting

Credit Card issuers and lenders typically report your account balances and payment history to the credit bureaus once a month. This reporting cycle can impact your Credit Score if you happen to pay off a Credit Card balance shortly before the lender reports the updated information.

For example, if you pay off a Credit Card balance a few days before the lender reports to the credit bureaus, your Credit Report may still show a balance, even if you have paid it off. This can temporarily affect your credit utilization ratio and result in a lower Credit Score. To mitigate this, consider paying down your balances a few weeks before the statement closing date to ensure a zero balance is reported.[2]

10. Mix of Positive and Negative Accounts

Another reason your Credit Scores may drop after paying off Debt is the mix of positive and negative accounts on your Credit Report. If you had a mix of both types of accounts before paying off Debt, the removal of positive accounts (due to closures) and the persistence of negative accounts could tilt the balance in favor of the negative, causing a temporary decrease in your Credit Scores.

In this scenario, it is essential to focus on handling the negative accounts while maintaining a strategy for rebuilding your positive credit history over time.[2]

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Why your Credit Score may drop after paying off Debt? Bright

Strategies to mitigate Credit Score Drops after paying off Debt

While it is essential to be aware of potential Credit Score drops after paying off Debt, there are strategies you can employ to mitigate these temporary setbacks and ensure that your credit remains on a positive trajectory. Let us explore some proactive steps you can take:

1. Take a Personal Loan: Taking out a consumer loan or a personal loan can indeed be a strategic move to improve your Credit Score. By making timely payments on these loans, you can demonstrate responsible borrowing behavior to credit bureaus, which can have a positive impact on your credit history. However, it's crucial to be cautious when pursuing this strategy. Only take out loans that you can comfortably repay, and be mindful of the interest rates and terms

2. Diversify Your Credit Mix: If you've paid off a significant portion of your Debt, your credit profile may become dominated by one type of credit (e.g., Credit Cards). To diversify your credit mix, you can consider responsibly applying for a different type of credit account, such as a personal loan or a secured Credit Card. Be cautious not to overextend yourself with new credit, and make sure to make on-time payments

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3. Monitor Your Credit Report: Regularly review your Credit Reports from all three major credit bureaus (Equifax, Experian, and TransUnion) to ensure accuracy. If you spot any errors or discrepancies, dispute them promptly. Monitoring your Credit Reports also helps you track your progress and catch any potential issues early

4. Time Your Payments Strategically: As mentioned earlier, the timing of your Credit Card payments in relation to the statement closing date can impact your reported balances and credit utilization ratio. To maintain a low utilization ratio, aim to pay down your Credit Card balances a few weeks before the statement closing date, ensuring that a lower balance is reported to the credit bureaus

5. Continue to Practice Responsible Credit Habits: Paying off Debt is just one aspect of managing your credit. Continue to make on-time payments for all your credit accounts, avoid maxing out your Credit Cards, and only apply for new credit when necessary. Consistent, responsible credit behavior will have a positive impact on your Credit Scores over time

6. Create a Financial Plan: Develop a comprehensive financial plan that includes short- and long-term goals, a budget, and a savings strategy. Having a well-thought-out financial plan will not only help you manage your Debt but also improve your overall financial health, which will reflect positively on your Credit Scores in the long run

Discover how Bright Money can assist you in consolidating your Debts for a more manageable and stress-free financial journey.

7. Consult a Credit Counselor: If you are struggling with Debt or credit issues, consider seeking advice from a certified credit counselor. They can help you create a customized plan to manage your Debt, improve your credit, and achieve your financial goals

8. Be Patient: Finally, remember that Credit Score changes can take time. The negative impact of closing accounts or other Credit Score fluctuations may be temporary. Over time, responsible financial habits will have a more significant and lasting effect on your Credit Scores[3]

Read more: Debunking Common Credit Myths: What Really Affects Your Credit Score?


While paying off Debt is a responsible financial decision that can improve your overall financial well-being, it does not always lead to an immediate boost in your Credit Scores. Understanding the various factors that influence your Credit Score is essential to managing your expectations and making informed decisions about your credit.

If you notice a temporary drop in your Credit Scores after paying off Debt, do not be discouraged. In most cases, your scores should rebound over time as you continue to demonstrate responsible credit management habits. Additionally, you can take steps to minimize the negative impact on your Credit Scores, such as keeping accounts open, maintaining a diverse credit mix, and monitoring your Credit Reports for accuracy.

Remember that Credit Scores are just one part of your finances. Building a strong financial foundation involves more than just managing your credit. It includes budgeting, saving, investing, and making informed decisions that align with your long-term financial goals.

Ultimately, while paying off Debt may result in a temporary Credit Score drop, the long-term benefits of financial freedom and reduced interest costs far outweigh the short-term fluctuations in your Credit Score. Focus on making sound financial choices, and your Credit Scores will reflect your responsible financial management over time.

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  1. https://www.experian.com/blogs/ask-experian/credit-education/score-basics/understanding-credit-scores/
  2. https://www.bankrate.com/loans/personal-loans/credit-score-fall-after-paying-loan/#:~:text=Credit%20scores%20are%20calculated%20using,utilization%20or%20average%20account%20age.
  3. https://www.nerdwallet.com/article/finance/credit-score-drop-pay-Debt


1. Can paying off a collection account improve my Credit Score?

Paying off a collection account can have a positive impact on your Credit Score, but it won't necessarily remove the account from your Credit Report. The collection will typically be marked as “Paid” or “Settled”, which is better than having an unpaid collection. However, it will not completely erase the negative history associated with the collection. The account will generally remain on your Credit Report for seven years from the date of the original delinquency.

2. How long does it take for Credit Scores to recover after paying off Debt?

The time it takes for your Credit Scores to recover after paying off Debt can vary depending on various factors, including the type of Debt, your overall credit history, and the specific scoring model used. In many cases, you may start to see improvements within a few months as your credit utilization ratio decreases and your payment history reflects on-time payments. However, significant improvements may take a year or more.

3. Can I negotiate to have closed accounts reopened after paying off Debt?

It is generally not possible to have closed accounts reopened after paying off Debt, especially if you closed the account voluntarily. Closed accounts may only be reopened under specific circumstances, such as if the closure was due to an error or misunderstanding. Instead, focus on maintaining your open accounts responsibly to build and maintain a positive credit history.

4. Will paying off student loans help my Credit Score?

Paying off student loans can have a positive impact on your Credit Score, as it demonstrates responsible Debt management. However, the effect on your score may be more subtle compared to other types of Debt. Additionally, your credit mix and other factors will also influence your overall Credit Score.

5. Can my Credit Score drop due to a credit limit decrease?

Yes, a credit limit decrease can lead to a drop in your Credit Score. This decrease can increase your credit utilization ratio, which is a significant factor in credit scoring. To mitigate the impact, consider maintaining a low balance relative to your new credit limit and avoid maxing out on the card. Additionally, you can request a credit limit increase to help balance your utilization ratio.

*Payment history has the biggest impact on credit score accounting for 40% of how score is calculated per TransUnion (https://www.transunion.com/credit-score). Bright Builder helps you build payment history that may positively improve your credit score. Credit score increase is not guaranteed. Individual results may vary. Late payments, missed payments, or other defaults on your accounts with us or others will have a negative effect on your credit score. Products and services subject to state residency and regulatory requirements. Bright Builder is currently not available in all states.

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