If you’ve got a significant amount of debt, paying off even one of those debts can seem like (and indeed is) a big accomplishment. Whether you’ve finally paid off a credit card, a car loan or something even larger like your mortgage, you might expect your credit score to increase.
In fact, paying off a debt may cause your credit score to decrease, at least temporarily — particularly if you close the account after you pay it off. Many people do that with their credit cards when they pay off the balance.
To understand the impact of paying off debt on your credit score, it’s important to realize that credit scores are calculated based on a number of factors. Payment history and current debt balances are the two biggest factors. However, the length of credit history is also a component. So are the amount of new credit and your overall credit mix.
If you’ve had a credit card or loan for many years and have been consistently making payments on time, that helps your credit score. When you pay off a loan, that account is typically closed because there’s no more need for it. If that was one of your longest-term credit products, you’ll likely see your credit score drop some.
A credit card or something like a home equity line of credit doesn’t have to be closed when it’s paid off. Therefore, you may want to consider whether it’s best to keep it open to improve your credit score or close it to avoid the temptation of using it again.
You shouldn’t avoid paying off any debt that you can afford to pay off because of the impact on your credit score. If you have a good credit history, your score should reflect that.
It’s a good idea to check your credit score with the three major credit-reporting agencies at least annually as well as when you pay off any of the debts reflected in them. You can get a free copy of each of the three reports every 12 months.
If you’re struggling with credit card or other debt, it may be wise to talk with an attorney who deals with debt relief. They can advise you of your options and help you decide what’s best given your individual situation.
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