Why Credit Scores Could Drop After Paying Off Credit Cards

Why Credit Scores Could Drop After Paying Off Credit Cards article image.

Paying off a credit card doesn't usually hurt your credit scores—just the opposite, in fact. It can take a month or two for paid-off balances to be reflected in your score, but reducing credit card debt typically results in a score boost eventually, as long as your other credit accounts are in good standing.

There are a few instances that you could experience a score drop, however. Below are some reasons why you might have seen a decrease in your credit score after eliminating a credit card balance.

Why Did My Credit Score Drop After I Paid Off a Credit Card?

Your score could have taken a dive after paying off a credit card if you closed that credit card when the balance hit zero. While paying off and then closing the card may have been your goal all along, the action could actually hurt your score. This is why it's usually best to keep credit card accounts open even if you don't use them frequently. (More on that below.)

If you close a credit card, your credit utilization ratio will likely increase. That's the proportion of available revolving credit that you're using at any one time. Experts recommend keeping utilization below 30% to avoid damaging your scores, and in the single digits to maintain the highest credit score possible. Because closing a card will reduce the amount of available credit you have, your scores could take a hit.

For example, let's say you have three credit cards that have a combined credit limit of $12,000. You pay off the balance on one of the cards and close it, bringing your combined limit down to $4,000. If you have a $1,500 balance across the other two cards, and you maintain that balance after closing the third card, your total credit utilization will climb from 12.5% to 37.5%.

In this case, it would be better to keep the third card open but use it sparingly so that you can benefit from its credit limit without adding to your debt.

Why Hasn't My Score Changed After Paying Off Credit Cards?

Your score won't get an immediate update once you pay off credit cards. That can be a disappointment when you've put a lot of effort into cutting down your balance. But all other things being equal, you will likely see an improvement in a relatively short period of time.

Credit card issuers typically report new information to the credit bureaus, including Experian, after the end of your billing cycle. So if you pay off a balance on April 10 but your billing cycle ends on April 30, the credit bureaus won't receive that information until at least three weeks after you've made the payment.

The credit scoring models (FICO® and VantageScore®) may not update your credit score immediately so that they can also take note of whether you've simultaneously taken on more debt, which would also be reflected in your credit score. All in all, allow for at least one to two months after paying off a balance for your credit score to be recalculated.

Should I Close an Unused Credit Card After Paying It Off?

In the short term, closing an unused credit card account will typically cause a drop in your score due to the change in your credit utilization. On the positive side, if you close your account in good standing (with no late payments), your account will remain on your credit report for 10 years, and you'll continue to benefit from that past positive payment history.

Even if closing an account hurts your credit, your score will likely rebound over time if you pay all bills on time across your other credit accounts and don't take on new debt. This can be a relief if you feel that closing the credit card is the best way to prevent you from accumulating more debt. You may also choose to close a card if it comes with a high annual fee that you can't afford or would rather not pay.

Other Reasons Why Your Credit Score May Have Dropped

While paying off credit cards often leads to a score increase, other credit activity could counteract those gains, or result in a drop in your score while you're waiting for the credit card issuer to report your paid-off debt to the credit bureaus.

For example, a late or missed payment on another credit card or loan will have a big impact on your score. That's because payment history is the most important credit scoring factor, accounting for 35% of your FICO® Score . The delinquency's effect on your score increases as time goes on, so a payment that's 90 days late has a greater impact than one that's 30 days late.

Applications for new credit, such as a private student loan, mortgage, credit card or car loan, can also cause a brief dip in your score. These applications create hard inquiries on your credit report, which means a lender has requested access to your credit file to evaluate your creditworthiness. Hard inquiries typically lower your scores less than five points and can stay on your report for two years.

Keep Tabs on Your Credit to Understand Changes

Your score may also drop if there is an error on your credit report, such as an inaccurately reported late payment from your credit card issuer. It's important to regularly monitor your credit report so you can take note of any updates to your accounts that could affect your score—and to recognize, and take action on, any inaccuracies that could negatively impact it.

How Good Is Your Credit Score?

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