Why is my credit score going down when I pay everything?

Why Your Credit Score May Drop When You Pay Off Debts

Maintaining a good credit score is crucial for financial well-being, but it can be frustrating when your score unexpectedly drops despite making diligent payments. One such scenario that can lead to a temporary dip in credit score is paying off debts.

Impact of Debt Repayment on Credit Factors

Credit scoring models evaluate your credit profile based on several factors, including:

• Credit Utilization: The percentage of your available credit that you’re using.
• Diversity of Credit Accounts: The number and types of credit accounts you have open.
• Length of Credit History: How long you’ve had credit accounts open.
• Payment History: Whether you’ve made all your payments on time.

When you pay off a debt, it reduces the number of active revolving credit accounts (e.g., credit cards) that you have open. This can impact the diversity and age of your credit history, which are both factors in calculating your score.

Temporary Dip in Score

As a result of these changes, your credit score may temporarily decrease. This is because the credit scoring model may perceive the closure of an account as a potential sign of financial distress or a lack of access to credit.

Score Recovery Over Time

However, it’s important to note that this dip is typically short-lived. Over time, your credit score should recover as other positive credit behavior compensates for the closed account. This includes:

• Making timely payments on your remaining credit accounts.
• Keeping your credit utilization low (ideally below 30%).
• Avoiding opening new credit accounts unnecessarily.

Additional Considerations

In some cases, paying off a debt can have a more significant impact on your credit score if:

• The debt was a large portion of your total available credit.
• The closed account was one of your oldest accounts.
• You have a limited number of other open credit accounts.

If you’re concerned about the impact of paying off a debt on your credit score, you can consider the following:

• Contact your creditor before closing the account to inquire if they can report it as “closed but not derogatory.”
• Keep a balance on your remaining credit cards, but pay them off in full each month to avoid interest charges.
• Monitor your credit score and dispute any inaccuracies that may affect its calculation.

Remember, maintaining a good credit score is a marathon, not a sprint. While paying off debts can initially affect your score, it’s a positive step towards improving your overall financial health in the long run.