Why Would Paying Off Credit Cards Decrease My Credit Score?

It is smart and rewarding to pay off your debt. You may also be surprised that your credit score has dropped after you make a payment. Credit scores are calculated using many factors so the reason for your credit score dropping could be multiple. Credit scores can drop following debt repayments for a variety of reasons, including a decrease in average age, changes in credit types, and an increase in overall utilization.

However, credit scores can be affected by paying off debt. These drops are often temporary. Paying off debt is generally more beneficial than negative effects. You can save significant money by paying off your debt or reducing your interest rate if you have high-interest debt.

You can still make sound financial decisions by understanding how paying off debt can lower your credit score in the short term. And you can work towards a higher credit score over the long term.

Several factors, including credit utilization, payment history, credit age, credit type, inquiries, and credit types determine a credit score. Your credit score could be affected by paying off debt.

Continue reading to find out why your credit score might have fallen after you have paid off the debt. Also, there may be other reasons that your credit score is lower.

Reasons for the decrease in the credit score

The following reasons may cause a decline in your credit score despite you paying off your credit card debt:

Your account may be younger than the average

Credit history is a ranking factor that determines your credit score. This includes your average age and length of credit.

Paying off the oldest account and closing it will cause your average age to drop. This could result in a decrease in your score.

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Closed accounts are not removed from your credit report until seven to ten years after they have been closed. However, they can be viewed differently than open accounts.

Your credit history will continue to grow over time and your average age of accounts will rise, so any drop in debt payments is likely to be temporary.

You may have fewer credit options now

The types of accounts on your credit report are another factor that will affect your credit score. Credit bureaus that report credit history generally want to see evidence of responsible credit usage.

Your credit report might list several credit cards and an automobile loan. Your credit mix will be less diverse if you close and pay off the loan. Your credit score may temporarily decline as a result.

However, you don't have to use every type of credit available. You can instead use different types of credit as you need it, and make sure to pay your bills on time. Responsible credit use will eventually improve your credit score.

Credit utilization could have increased

Your credit score can also be affected by your utilization. This is simply how much credit you actually use. If you have $200 in credit and your only credit card has a limit of $1,000 then you are using 20% of your credit.

Lenders want to see that your credit utilization is at least 30 percent. This signals that you can manage your finances and not rely too heavily on credit.

The amount of credit you have available decreases if you close an account and pay off credit card debt. Your overall credit utilization could rise, which can lead to a decrease in your credit score.

It's a good rule of thumb to keep older accounts open, even if they don't get used often.

Other reasons that may cause your credit score to drop after you pay off your debts.

These are the most common reasons that a score drops after paying off debt. However, there are other possible causes.

These are some things you should remember if your score has changed after paying off debt.

• You paid off an older collection account. In some cases, the collection agency may change the date of the debt if you make payments on an old collection account. The debt may have a greater impact on your credit score if it resurfaces on your credit report as a newer account.

• There has been not enough time since the payment of the debt. Credit bureaus might not have information on your debt payment for up to 30 days. You'll need to check your credit reports to verify that the account is paid.

• Paying off debt does not cause your score to drop. Credit scores are complex calculations. There could be other reasons your score has changed. You could have applied for a new credit line, missed a payment on another account, or had inaccurate credit information.

If you notice your credit score dropping, you should get a copy. It will be easier for you to determine what they're reporting about you after reviewing your credit reports from TransUnion, Experian, and Equifax.

You'll want to check whether your debt has been paid off. Also, be aware of any inaccurate or negative information on your credit reports. Negative items that are unfair can affect your credit score. Federal law permits you to dispute any incorrect information on your credit reports.

You can file a dispute to contest false information. This is an essential part of the process of fixing your credit and improving your score. Lexington Law Firm can help you with all aspects of credit repair, including reviewing your credit report and disputing incorrect information. A fair and accurate credit report is a key first step toward achieving your credit score goals.