When you pay off a credit card, you might expect your credit score to go up. After all, you’re reducing your debt-to-credit ratio, which is one of the key factors that go into calculating your score.
Now that you paid off your credit card, the opposite happened and you may be wondering: Why did my credit score drop when I paid off a credit card?
What is a Credit Score?
A credit score is a number that represents your creditworthiness. Lenders prefer it to determine whether or not you’re a good candidate for a loan and, if so, what interest rate you’ll be offered.
The higher your score, the lower the risk you pose to lenders, and the better your chances of getting approved for a loan with a low-interest rate.
There are a few different scoring models in use today, but the most common one is called FICO® Score 8, which was introduced in 2009.
This model ranges from 300 to 850, with scores of 700 and above considered “good” and scores of 800 and above considered “excellent.”
What Causes a Credit Score to Drop?
There are a number of different factors that can cause your credit score to drop, including:
- Missing a payment on a loan or credit card
- Maxing out your credit cards
- Opening too many new lines of credit in a short period of time
- Having a high debt-to-credit ratio
- Closing an older line of credit
Read on to learn more about why your credit score drops when paying off debt.
Paying off a Credit Card Can Actually Lower Your Score
One thing that can actually cause your score to dip is paying off a credit card as per.
Your credit utilization ratio goes down
One of the most important factors in your credit score is your credit utilization ratio – that is, the amount of debt you have compared to your total credit limit.
When you pay off a credit card, your credit utilization ratio goes down – even if you don’t close the account.
That’s because your total available credit increases (because your debt has been paid off), but your total credit limit stays the same. So, your debt-to-credit ratio decreases, which can lead to a drop in your score.
You lose the positive history associated with the account
Another important factor in your credit score is the length of your credit history. When you pay off an old credit card and close the account, you’re effectively losing the positive history associated with that account.
That can shorten your average credit history, which can lead to a drop in your score.
You might close an unused account
If you have an unused credit card that you never use, it might actually be helpful to keep the account open. That’s because it can help improve your credit utilization ratio (as long as you don’t carry a balance on the card).
But if you close the account, you’ll lose that positive impact on your utilization ratio – which could lead to a drop in your score.
You might trigger a hard inquiry
When you apply for a new credit card, the issuer will make a hard inquiry on your credit report. This can temporarily lower your score by a few points.
So, if you’re thinking about opening a new credit card to offset the loss of points from paying off an existing card, it’s not going to work – you’ll just end up further lowering your score.
You might increase your average age of accounts
Another factor that goes into your credit score is the average age of your accounts. So, if you have a bunch of old accounts that you’ve paid off through collection companies and closed, you’re actually increasing the average age of your accounts – which can lead to a drop in your score.
Why did my credit score drop when I paid off a credit card? Paying off a credit card can sometimes lead to a drop in your credit score.
But it’s not necessarily a bad thing – after all, you’re reducing your debt, which is always a good thing. And, over time, as your credit utilization ratio improves and your credit history lengthens, your score will likely rebound.
So, don’t be too concerned if you see a small dip in your score after you pay off a credit card – it’s likely to be temporary.