Paying off a loan can be a big relief—but if you monitor your credit scores, you might be surprised to find your scores don't improve. In some cases, they may even drop a little. It can be counter intuitive, as successfully paying off a loan and having fewer bills is good for your personal finances. Most likely the impact will be temporary.
Here are a few reasons why your score might drop when you pay off a loan:
- It was your only installment account: Having a mix of revolving accounts (like credit cards) and installment accounts (such as loans) is generally good for your credit scores. If the loan you paid off was your only installment account, you might lose some points because you no longer have a mix of different types of open accounts.
- It was your only account with a low balance: The balances on your open accounts can also impact your credit scores. If the loan you paid off was the only account with a low balance, and now all your active accounts have a high balance compared with the account's credit limit or original loan amount, that might also lead to a score drop.
- Your scores dropped for a different reason: Many factors impact your credit scores, and the drop might be a complete coincidence. For example, if you recently applied for a loan or credit card (even if you didn't get approved) or your credit card balance increased (even if you paid your bill in full), that could lead to a temporary score drop.
In general, paying off a loan won't have much of an impact one way or the other, and if your score does drop, the change will likely be temporary. But the presence of the account on your credit reports can continue to impact your scores for years to come.
