There has been a lot of information that’s swirling around on the internet lately, some of it right, some of it wrong, surrounding credit scores. I’m creating this Credit Myths series as a resource for some of the more commonly asked questions about credit scores.
Can my credit score go down after paying off a loan?
This might be surprising, but your credit score can sometimes go down temporarily after paying off a loan. While repaying debt is generally a positive financial move, the way credit scores are calculated means there can be a short term dip in certain situations.
One key reason is that paying off a loan, especially an installment loan like an auto loan, personal loan, or student loan, can affect your credit mix and credit history length. Credit scoring models reward borrowers who successfully manage a variety of credit types, such as both revolving (credit cards) and installment accounts. If a paid-off loan was your only installment account, you may lose points in the credit mix category.
Once a loan is paid off and closed, it stops contributing to your credit age and payment history, two other important factors. This can lead to a minor score drop, especially if you don’t have many other active accounts.
However this decrease is usually temporary. Over time your credit score will likely rebound and even improve as paying off debt reduces your total obligations and shows lenders you’re a responsible borrower.
To maintain or boost your credit score after paying off a loan:
- Keep other accounts (like credit cards) in good standing.
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Avoid taking on unnecessary new debt.
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Continue making on-time payments.
While your credit score might dip slightly after paying off a loan, the long-term impact is typically positive. Paying off debt reduces financial risk and strengthens your overall creditworthiness. If your score is lower than you’d like, you’d probably benefit from a service like this one which lets you keep track of your credit and improve it for you.