Why Did My Credit Score Drop When I Paid Off My Car?

Paying off your car after owning It for three to five years Is one of the most rewarding experiences, but we often get comments by Credit Score Planet visitors complaining that their credit score dropped right after paying off their car. The truth Is that paying off a car, while great for you, can have a negative Impact on your credit score. So, why does your credit score drop when you pay off your car? We will answer this question In much detail below.

Why Did My Credit Score Drop When I Paid Off My Car?

The main reason why your credit score may have dropped when you paid off your car loan Is that your car loan was the only Installment account that you had on your credit report. Paying It off means closing the account, which affects the credit mix that you have. Having less of a credit mix can lower your credit score.  Don’t worry too much because the drop In your credit score Is likely to be temporary and your score will go back up.

An alternative reason as to why paying off your car may have caused a drop In your credit score Is that It was one of a few accounts on your credit report that had a low balance. For example, If you have other accounts with high balances and your auto loan was the only loan with a low balance compared to the original loan amount, your car loan account may have been helping your credit score, and closing the account may have caused a drop In your credit score.

That said, your credit score may have dropped for a reason unrelated to paying off your car and the drop In your score may have been a complete coincidence. For example, many things can lower your credit score, such as applying for a credit card or loan, an Increase In the balance on your other credit accounts, or derogatory mark being added to your credit report.

The best way to determine whether paying off your car dropped your credit score Is to pull your credit report and look to see whether there were any other changes to your credit report that coincide with you paying off your car. If there Is something else, It may be the culprit, but If the only thing that changed was paying off your car, then closing your car loan account may have been the reason your score dropped.

That said, If paying off your car loan did Indeed decrease your credit score, you shouldn’t worry too much as your score will bounce back with time and the drop will be temporary. You should only worry about making your payments on time, so long as you do that, you have nothing to worry about.

Paying Off Your Car Loan Can Have a Long-Lasting Impact on Your Credit Score

Even though your credit score may have gone down after making your final payment on your car, If you made all your payments on time, the paid off account will continue to show on your credit report and may positively Impact your credit score because It shows that you were able to take out a loan and you were responsible enough to make all your payments on time and close the account.

That said, If you missed any payments on the loan and you later paid It off, the account may negatively Impact your credit score long after the account has been paid off or closed. So, to avoid having a car loan hurt your score, make sure that you make all of your payments on time so that you leave a positive account history upon completion of your payments.

If your repaid your car loan In full and never missed a payment on you’re account, the account will remain on your credit report for ten years. That said, If you missed any payments on your car loan, the negative marks will only remain on your credit report for 7 years, after which they will be automatically removed from your credit report. The 7-year clock begins when you first miss a payment or fall behind on making, you’re auto loan payments.

How to Avoid a Credit Score Drop After Paying Off Your Car?

There really Isn’t anything that you can do to avoid a small drop In your credit score after paying off your car. You should not stretch out your car loan to avoid a small drop In your credit score. You should only worry about making your car payments on time as payment history accounts for 35% of your credit score. Missing a single payment on your car can cause some serious damage to your credit score. So, focus on paying off your car loan and don’t worry about a small drop In your credit score.

Also, get In the habit of periodically checking your credit report and score to ensure that nothing negative Is pulling your score down. Oftentimes, wrong Information Is added to your credit report, which can lower your credit score. As a rule of thumb, you should try to check your credit score once a month just to make sure that nothing derogatory Is showing up on your credit report. If anything derogatory does show up and does not belong to you, dispute It through the credit reporting bureau reporting the Incorrect Information to have It removed from your credit report.

Credit Score Planet Frequently Asked Questions

1) How much can your credit score drop after paying off your car?

Not every person will experience a drop In their credit score after paying off their car. That said, some persons have seen a drop of 40 to 60 points after paying off their car, while others have only experienced a 10-point drop. The answer to this question really depends on what other Information Is In your credit file.

2) Will my credit score drop after paying off my car?

Not necessarily. Some experience no change In their credit scores, while other experience a small drop and others a big drop. The answer to this question differs from one person to another.

3) Is paying off a car loan early good for your credit?

Not necessarily. Although rewards, paying off a car loan early Is not necessarily good for your credit score. Having an Installment loan account that Is In good standing usually Increases your credit score because It contributes to having a good mix of credit. Oftentimes, paying off or closing a car loan can drop your credit score slightly.

4) Does your credit score Increase after paying off a car?

The answer to this question differs from one person to another. In some cases, paying off a car loan can Increase your credit score, while other times It can cause a drop In your credit score.