2 min read Q&A

Why did my credit score drop when I paid my credit card off?

Published:

/

Last Verified: June 15, 2023

This is one of the most common questions we receive. This is a valid concern, and it can be confusing when what seems like a positive financial move negatively impacts your credit score.

It’s important to remember that credit scores were designed to calculate the risk of you defaulting on a loan, not to save you the most money. Consequently, they don’t always operate in a way that seems logical to us.

Here are the reasons why your score may have dropped:

All Your Cards Have Zero Reported Balances

If all your cards have reported zero balances, you may see a small drop in your credit score. Research shows that people who have a low amount of revolving debt being reported relative to their available revolving credit are generally less risky compared to people with no revolving debt being reported. You don’t have to pay interest; you could make a small purchase, like a cup of coffee, and pay it off in full when your bill comes due. This keeps your credit active and everyone happy.

You Closed Your Card

When you close a credit card, you reduce your total available credit. This increases your credit utilization ratio, which is the amount of credit you’re using compared to your total credit limit. A higher credit utilization ratio can negatively impact your credit score.

Other Possible Reasons for a Drop in Your Credit Score

Sometimes, a drop in your credit score might coincide with paying off your credit card, but the two events may not be related. Other factors could be responsible, such as a late payment on another account.

The Relevance of Small Drops in Your Credit Score

Small drops in your credit score are not usually a cause for concern. It’s common for scores to fluctuate slightly over time. What’s important is maintaining healthy financial habits, including regular credit activity, timely payments, and low credit utilization.

In conclusion, while paying off a credit card can sometimes lead to a small drop in your credit score, the overall impact is often minimal and temporary.

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments