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Why did my credit score drop after clearing off my loan?

For credit score calculation, there is a particular formula. The credit score is an indicator of how likely I am to pay back my debt on time. Thousand of factors contribute to the credit score formula, and clearing off debt does not assertively impact all of them. Clearing off debt may cause a credit score drop if it changes my credit mix. Also changes in credit utilization, or average account age.

Here are some scenarios that could be the reasons for a credit score drop:

I eliminated my only installment debt or revolving debt:

Creditors like to see that I’m able to manage different types of debt. If I eliminate a specific debt that makes my credit report less diverse. It can be one of the reasons for my credit score drop. For instance, if I pay off an auto debt and are left with only credit cards, my credit mix will suffer.

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• I’ve increased my overall credit utilization:
• Keeping the overall utilization of my available credit low results in a stronger credit score. But when I clear off a revolving line of credit or let the account go inactive (which often leads to it being closed), it lowers the total amount of credit I have available, potentially increasing my remaining utilization rate.
• I’ve lowered the average age of my accounts:
• The longer my accounts have been open and in strong position,the better. Having a 20-year old account on my report is a green flag,even if I don’t use it.If I will lose the account and leave accounts no more than five years old,it will dramatically reduce the average age of my accounts.

What must be your next step?

Clearing off debt is rarely the wrong decision, especially high-interest consumer debt. This holds right even if it causes a credit score drop. My financial health is more crucial than my credit score, especially because there’s no way to fully predict the results of each action I take. Consequently, if I continue to make timely payments on my outstanding debts and keep my spending in check, I will see my credit score start to boom again with time.

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