Why Did My Credit Score Drop After Paying Off a Credit Card?

Maintaining a good credit score is essential for any person living in the United States because it determines you’ll eligibility for credit cards, auto loans, and home loans. That said, have you ever paid your credit card and noticed that your credit score dropped after doing so? We will discuss this in much detail below.

Why Did My Credit Score Drop After Paying Off a Credit Card?

The consensus among credit card experts is that paying off your credit card should not lower your credit score, but many people have reported a slight drop in their credit score after completely paying off their credit cards. Experts state that your credit score is best served when you pay down your credit card to a zero balance. That said, one expert stated that paying off a credit card down to a $0 balance could cause a slight decrease in a person’s credit score because it shows the credit reporting bureaus that you’re not utilizing any of your available credit.

So, if you’re really worried about your score dropping a few points, you can keep a small balance (less than 10%) of your available credit so that the credit reporting bureaus see that you’re utilizing your available credit and making payments on time.

That said, paying off your credit card debt is a great thing for your finances, and you should not worry about a small drop in your credit score. The most important thing is that you borrow money and repay responsibly. The small drop in your credit score is not permanent and your score will go back up as soon as you spend money on your credit cards and a balance appears on your credit report.

CSP Pro Tip: Although it may be tempting to keep a balance on your credit card to avoid a drop in your credit score, you should not keep a balance if you can comfortably afford to pay it off. The small drop in your credit score is negligible and should be ignored. You should focus on charging only as much as you can afford to pay off at the end of the month. You could leave a small balance on your credit cards if you really want to avoid a small drop in your credit score, but it’s not worth it. With a few months of using your credit cards and paying them off on time, your credit score will go back up.

Causation or Coincidence

If you have noticed a drop in your credit score after paying off your debt, the drop may have been caused by something other than paying off your debt. We know that notifications from the service that you check your credit score may show a drop in your credit score that coincides with paying off your debt, but the truth is that the drop could be caused by something unrelated.

For example, if you paid off one credit card but used a different credit card for your purchased, the increase in credit utilization from another account could be the culprit for the drop in your credit score.

Also, if you applied for any new credit cards or loans around the same time that you paid off your credit, your credit application could have caused a drop in your credit score. This is so because every time you submit an application for a new credit card or loan, the lender or creditor places a hard inquiry on your credit report. A hard inquiry can lower your credit score by 5 to 10 points.

That said, some people are adamant that paying off their card caused their credit score to drop. The truth is that a lot goes into calculating your credit score and a lot of information changes that you don’t see. So, the drop could be caused by a variety of other factors that you had no idea existed.

Paying Off Debt and Closing Your Credit Card

If you paid off your credit and then proceeded to close it, you may have noticed a drop in your credit score. This is normal and could be attributed to a number of reasons. Closing down your credit card can cause a drop in your credit score because it reduces the mix of credit that you have, reduces your overall account age, and reduces the amount of available credit that you have, which causes an increase is your credit utilization.

Credit Mix

The credit reporting bureaus reward persons who have a good credit mix, meaning having diverse accounts, such as credit cards, home loans, car loans, department store cards, and student loans. Whenever you close an account, you reduce your credit mix, so this can contribute to a lower credit score.

Account Age

When you shut down an account that you’ve had for a long period of time, you’re reducing the average age of all of your accounts. The average account age makes up 15% of your credit score. So, if you’ve wondered why your credit score dropped after paying off your credit card and closing your account, this may be a contributing factor. If you want to improve your credit score, keep old accounts that are in good standing open for as long as possible. You may be tempted to close an old account that you barely use, but just know that this could hurt your credit score.

Credit Utilization

Whenever you close one of your credit cards, you’re effectively reducing the amount of available credit that you have. Reducing the amount of available credit has the potential to increase your credit utilization. An increase in credit utilization has the potential to lower your credit score. As a rule of thumb, you should strive to keep your credit utilization below 30%, meaning you should not keep a balance of more than 30% of your available credit. For example, if you have a $1000 credit limit, you should not keep a balance of $300 or more on your credit card. If your credit utilization exceeds 30%, it will cause a drop in your credit score. So, closing down an account can potentially cause a drop in your credit score for this reason.

Bottom Line

As long as you only pay off your credit card and don’t close it down, a small drop in your credit score is negligible and should be ignored. Just continue to use your credit card and pay on time and your credit score should be okay so long as you keep the account open. A temporary drop in your credit score is no reason to keep a balance on your credit card.

Paying Off a Credit Card vs Paying Off a Loan

The great thing about paying off your credit card is that your credit card account remains open after you’ve made your final payment. This is different from an installment loan, such as a car loan or a home loan. When you make the final payment on an installment loan and pay it off, the account is closed. When you close an installment loan, the closure will cause a slight drop in your credit score. That said, the impact of closing down the installment account will fade with time and your score will recover. If you made all of your payments on time, the installment account will remain on your credit report and positively impact your credit score. If you missed any payments, on the installment account will remain on your credit report for seven years from the original delinquency date.

Will Your Credit Score Increase After Paying Off Your Debt?

Yes, your credit score should increase after you’ve paid off debt, such as credit card debt, so long as you don’t subsequently close your credit card account and nothing else is negatively impacting your credit score. That said, if you pay off debt, such as an installment loan (home loan, car loan, student loan), you may experience a small initial drop in your credit score because paying off an installment loan effectively closes the account, which could cause your credit score to drop. That said, if your credit score has dropped after paying off installment loan debt, if you made all your payments on time, the account should continue to help your credit score for ten years.

How Long Will it Take Your Credit Score to Improve After Paying Off Your Credit Card?

If you have paid off credit card debt, it takes approximately 30 to 60 days for your credit score to improve. However, your credit score could improve earlier, it really depends on when your bank or lender reports the account status to the credit reporting bureaus. Usually, banks and lenders report your account status on a monthly basis, but it could take longer in some cases. Once your bank or lender reports your account status to the credit reporting bureaus, the bureaus will calculate a new credit score for you based on the new information.

Credit Score Drop After Paying Off Credit Card

Although it is highly unlikely that paying off your credit card caused a drop in your credit score, some experts believe that paying down all of your balances to a $0 balance could cause a slight decrease in your credit score. That said, a small drop in your credit score due to paying off debt is negligible and should be ignored. Continue to spend only as much as you can afford to pay off at the end of the month and follow good good habits and your credit score should improve. If you have any general questions or comments, please feel free to leave them in the comments section below.