Watching your credit score dip — especially after completing a financial milestone like paying off your credit card — can make anyone frustrated. Remember, a few points here and there is no big deal as credit scores fluctuate all the time. But if you noticed a significant drop after you paid off your credit card debt, then there could be a few reasons why.
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What Makes Up Your Credit Score?
A quick reminder that you have two credit scores: your FICO credit score and your VantageScore. Depending on which model you check, your credit score is weighted differently and with varying factors. Your FICO credit score, for example, is made up of five components:
— Payment history: 35%
— Credit utilization: 30%
— Length of credit history: 15%
— Credit mix: 10%
— New credit: 10%
Your VantageScore 4.0, the one used most often, weighs elements a little differently and consists of six factors:
— Payment history: 41%
— Depth of credit: 20%
— Credit utilization: 20%
— Recent credit: 11%
— Balances: 6%
— Available credit: 2%
Both score models range from 300 to 850 but have different descriptors for their ranges.
| FICO Score | FICO Credit Rating | VantageScore | VantageScore Credit Rating |
| 800 to 850 | Exceptional | 781 to 850 | Superprime |
| 740 to799 | Very Good | 661 to 780 | Prime |
| 670 to 739 | Good | 601 to 660 | Near Prime |
| 580 to 669 | Fair | 300 to 600 | Subprime |
| 579 and lower | Poor |
However, unless you change tiers/ranges, it’s important to know that a few points here and there won’t impact your creditworthiness or borrowing power.
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Why Your Credit Score May Have Dropped
Scenario 1: You Closed Your Credit Card
If you paid off your credit card and then decided to close the account, that could lead to a dip in your credit score. This is for a number of reasons:
— Closing your account lowers your total available credit, which can result in a higher credit utilization ratio.
— If the account was several years old, it could impact the length of your credit history.
— If you don’t have many different types of debt on your credit profile, losing a type of revolving debt could negatively affect your credit score.
This is not to say that you should never close a credit account, especially if doing so is the best way to prevent yourself from taking on more debt. It simply means your score will take a hit but will eventually rebound. Remember, an account that was closed in good standing will remain on your credit report for 10 years, allowing you to benefit from that positive payment history.
Scenario 2: Your Credit Utilization Is Too Low
You’ve probably heard that age-old rule of thumb to keep your credit utilization below 30% — which is true. Overzealous cardholders can take that rule to heart and lower their utilization all the way down to 0%, but that might actually do more harm than good.
According to Experian, keeping your utilization at 0% could actually backfire, and the best ratio is actually in the single digits.
Now, this doesn’t mean carrying a revolving balance will help your credit score. Almost 60% of Americans incorrectly think keeping a revolving balance month to month — which means incurring interest charges — boosts your score.
In this instance, the recommendation is to use your credit card regularly for small purchases and maintain a low or zero balance, essentially paying off your balance in full before incurring interest charges. This way, your credit utilization is above 0% but below 10%.
Scenario 3: The Drop Is Just Temporary
Depending on how many points your credit score dropped after you paid off your debt, the drop could just be temporary as the credit usage on your profile adjusts. Also, while waiting to see the positive effects of your debt payoff, other credit activity could pop up first, influencing your score.
Issuers also typically don’t report new information to the credit bureaus until after the end of your billing cycle. So if you paid off a balance on April 10, for example, 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 that final payment.
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How to Stop Your Score From Dropping
Remember, paying off debt will only improve your credit score in the long run. But here are ways to ensure that happens:
— Pay your bills on time and in full. Put small purchases — like monthly streaming subscriptions — on the account and then pay your statement balance in full each month. This way, your account remains active, but you’re not paying interest on any transactions.
— Don’t close your account. If the account is one of your oldest, it may make more sense to keep it open. As long as there’s some activity on your account, the issuer won’t close it or reduce your limit, allowing you to benefit from the credit history length.
— Avoid opening new lines of credit. At least until you see the positive effects of paying down your debt, don’t apply for any new lines of credit. Doing so will ding your score, and it’ll be difficult to decipher the exact reason why.
— Monitor your credit. Paying off your debt is more likely to improve your score, not hurt it. So it’s best to consistently monitor your credit to understand any changes that might pop up, including errors.
[See: Our free credit monitoring tool]
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Why Your Credit Score Might Drop After You Pay Off Your Card ? And How to Prevent It originally appeared on usnews.com