When you pay off a large chunk of debt, it is natural to expect your credit score to rise as a result. Unfortunately, that is not always the case. Your credit score can actually drop after paying off debt, though it is very much temporary. If you would like to learn why this happens, and potential ways to mitigate the drop in your credit score, utilize this informative guide to learn what you need to know.
Factors Used to Calculate Your Credit Score
Your credit score is actually based on several different factors of various weights. Your lenders may calculate your score by looking at your payment history, credit utilization and total balances across all open accounts. The lenders also look at the length of your credit history and number of hard pulls on your account.
Each factor has a specific weight that affects its impact on your credit score. Payment history tends to rank higher than hard pulls, for example. Your credit score will rise and fall as these metrics lean either way out of the ideal ranges. By understanding which factors have the biggest impact, and fine-tuning your credit with that in mind, you can bring your credit score into an ideal range with ease.
How Paying Off Debt Can Decrease Your Credit Core
When you pay off debt, you can tilt the balance of the factors used to calculate your credit score. The big payoff may come with a hit to your utilization or balance totals, for example, causing your score to drop. If you closed the account with your final payment, you could suffer a serious credit score drop temporarily, as this will impact the combined age of your credit accounts.
If you used the paid off account to justify opening another, the hard pulls used to assess your credit worthiness can impact your score. Try to let the paid off debt simmer for a few weeks at least to see the impact on your credit score and make your financial plans before moving forward.
Ways to Keep Your Credit Score from Dropping After Paying Off Debt
After you pay off a large debt, you can make sure your score does not drop by utilizing the following techniques. Unless you paid off an installment loan, you do not have to close the account when you pay it off. For revolving accounts, leave them open and secure the card somewhere safe where you will not use it. Keep a zero balance to preserve your credit utilization and balance metrics for the best score possible.
Perhaps nothing can impact your score more than timely payments, so commit to always paying your bills on time to maintain the highest credit score possible. You can manage the other factors as you go to optimize your score and qualify for future credit offers. Taking the time to preserve your credit will pay off in the form of a maximized score and available credit, such as no doc business line of credit, when you need it.