Skip to Content
Tally logo

Why Did My Credit Score Drop After Paying off Debt?

Pondering why your credit score dropped after paying off debt? It might sound counterintuitive, but there’s a reasonable explanation.

January 18, 2022

Paying off your debt has some clear perks: You’ll gain peace of mind and be able to get your finances in shape. Many people also hope to see their credit score recover, so if you’ve found the opposite is true, you’re probably asking anyone who’ll listen: “Why did my credit score drop after paying off debt?”

But personal finance is rarely simple. If you’ve found yourself in this predicament and you’re wondering what to do about it, you’ll need to understand which factors affect credit scores, how paying off debt impacts them and what you can expect from the future. Keep reading to find out. 

How credit scores work

To know why your credit score dropped after paying off debt, the first piece of the puzzle is understanding how credit scores work in the first place. 

For starters, the three main credit bureaus — TransUnion, Equifax and Experian — collect information from lenders about the behavior of borrowers. This information appears on your credit report, which contains a detailed outline of your credit history. FICO then uses the information on your credit report to assign you a credit score. 

Keep in mind, there are a couple of different scoring models used to calculate credit scores, but we’ll be focusing on the FICO Score (broken down below), since it’s so widely used. That said, VantageScore —another scoring model — follows a similar pattern, so the information should broadly apply to everyone.

Your FICO Score is a number that falls into one of the following categories:

  • Poor credit score: 579 and below

  • Fair credit score: 580-669

  • Good credit score: 670-739

  • Very good credit score: 740-799 

  • Exceptional credit score: 800 and above

But what do these numbers really mean, and what exactly are they based on?

Factors that affect your credit score

FICO scores are determined by the following factors in order of importance:

  • Payment history

  • Amounts owed 

  • Length of credit history

  • Credit mix 

  • New credit

As you can see, “paying off debt” doesn’t exactly appear on the list above — but it’s strongly linked to some of the factors that do.

Why did my credit score drop after paying off debt?

Now that you know which aspects affect your credit score, you can piece together why a credit score can drop after you pay off debt. 

Credit utilization

The “amounts owed” segment of your score is partly about credit utilization: the proportion of your available credit that you actually use. 

Let's say you have three credit cards with the following credit limits: $5,000, $3,000 and $2,000 (meaning your total available credit is $10,000). If you max out the $5,000 card and spend $2,000 on each of the other two cards, your credit utilization ratio would be 90%.

Meanwhile, another borrower with the same credit limit might only use a total of $1,000 on all three cards. Their credit utilization ratio would be 10%. Lenders usually view a borrower with a 10% credit utilization ratio as less risky than someone with a ratio of 90%.

If you were to pay off the debt on your $5,000 credit card, your credit utilization ratio would drop to 40%, which should also improve your score. But if you were to close the credit card instead, you'd have less credit available ($5,000 instead of $10,000), so your credit utilization ratio would remain relatively high.


Length of credit history

Similar to credit utilization, closing a credit account can have a negative effect on another factor: length of credit history. 

Returning to the above example, let's say you’ve had the $5,000 credit card for 15 years, making it your oldest credit account. If you close that card, it won’t just be your credit utilization ratio that takes a hit. Your length of credit history may be impacted too, which could also harm your credit score.

Credit mix

Then, there’s the credit mix to consider — how many different types of credit you have. 

Ideally, you should have a mixture of revolving credit (like credit cards) and installment loans (like personal loans or auto loans) to your name. But if you pay off your only installment loan, this diversity will disappear.

Time lags

Bear in mind that credit scores don’t update the second you do anything. Credit scoring agencies like FICO collate data from third parties; they don’t become immediately informed about everything you do. For this reason, it may take some time for your freshly paid off debt to be reflected in your score.

How long does it take for credit to go up after paying debt?

Fortunately, the perceived negative effect of paying off debt on your credit score is usually just a temporary drop. In many cases, credit card issuers wait until the end of a billing cycle to report their data to credit scoring agencies, so the difference between the date you pay off your debt and the last day of your cycle is the minimum you can expect to wait for your score to change. However, it can take longer, so be prepared to wait one or two months.

Over the long run, paying off your debt will start to increase your credit score, especially if you pay attention to the many other significant factors that determine it. Plus, even after you pay debt off, your closed accounts will remain on your credit report for 10 years — so you’ll reap some benefits from your loan for a while.

However, this depends on exactly how your future credit behavior turns out. If you pay off your credit card debt but proceed to default on your student loan, your credit score is unlikely to make a swift recovery.

How to keep your credit score in good shape

If you want to build credit or simply maintain a good score after paying off debt, it’s wise to ensure you’re not accidentally doing anything to compromise your efforts. 

Here are a few tips for a healthy credit score.

Don’t check your score excessively

If you’ve found out that your credit score is lower than you’d like, your natural reaction is probably to continuously check it to find out if it’s increased yet. 

But paying off debt isn’t the only seemingly innocent action that can temporarily lower your credit score. Checking your credit score can also lower it if you’re making hard inquiries (such as those applying for new lines of credit or loan products).

Opt for soft enquiries only and, even then, limit yourself to checking your score once a month max.

Take care of your credit utilization

As mentioned above, your credit utilization is one of the factors that can lead to a credit score drop after paying off debt. You should aim to keep yours at around 30%.

Since data is sent to scoring agencies at the end of the billing cycle, the safest way to keep your credit utilization low is to pay some portion of your balance off before the end of the billing cycle. 

You could also consider requesting a credit limit increase or opening a new credit account (although this can have negative short-term consequences due to making hard inquiries).

Make on-time payments

If you’ve paid off one debt but still have other loans outstanding, it’s essential to avoid late payments — and, even more importantly, to not miss payments altogether.

Although this sounds simple, it can be hard to stay on top of all the relevant dates and rates if you have lots of credit accounts to your name. Set automated payments from your bank account if possible.

Another option is to use a repayment app like Tally†. Tally helps you manage credit card debt by making payments on your behalf, reducing your chances of facing late charges.

Don’t let a number define you

Regardless of what your credit score says, wiping your slate clean when it comes to loans and credit cards is something to be proud of. Just because the system can be a little discouraging sometimes, it doesn’t mean that achievement should be taken away from you. Still, making good financial decisions is key to ensuring your credit score is in better standing in the future.

One way to set yourself up for success is by using a tool like the Tally† credit card repayment app. In addition to managing payments for you, Tally consolidates your credit card debt with higher interest rates into a lower-interest line of credit. This can contribute to improving your debt management, helping you take control of your financial health.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.