Why did my credit score drop after paying down debt?

Recently, someone told me his credit score dropped after paying down debt. She was angry, dejected, worried, and frustrated. Her frustration is normal and justified. In fact, this is one of the top questions asked in forums every day. So I wanted to write a detailed post to give people a good link to read when they ask the same question again.

Jane: "My balance on Discover credit card was $185. My FICO score was 723. I paid it off yesterday with my tax refund. Today, I got an alert showing my payment has been posted but my credit score dropped by 11 points. What’s wrong? Why did my credit score drop after paying off debt? What can I do to get my credit score up? I’m panicked because I’m going to apply for a mortgage soon."

Stacy: "You didn’t lose points because you paid off your debt. Your credit score dropped due to some other reasons, which I’m explaining later."

You paid off debt. It was a trigger-worthy alert and this is why FICO notified you. FICO has pulled a brand new credit report and recalculated your credit score. You can’t view your credit report from alerts though.

Let’s come back to your main question now - ‘Why did my credit score drop after paying down debt?'

Your credit score dropped due to some other changes on your credit report. Those changes might not be something to trigger an alert in the past but might be enough to drop your credit score.

Many people pay a significant portion of their credit card to reduce their credit utilization ratio from 30% to 10%. They expect to see a positive change in their credit score but to their utter shock, they see a drop in their score. Others paid off car loans to boost their credit score. But they also saw a drop in their credit score.

A drop in the credit-utilization ratio is enough to trigger an alert. This is why people got a FICO alert. But people couldn’t realize that there were a few other changes on the credit report. May be their credit score dropped because a different credit card reported a higher balance. May be their total debt-to-income ratio increased and pulled down their score.

Next time don’t get shocked when you see a drop in your credit score after making a few extra payments on your mortgage. Don’t start thinking ‘why my credit score dropped for no reason or why my credit score dropped for nothing.’ Always pull your credit report and find out the reason behind the drop. May be, a few mortgage inquiries pulled down your credit score.

How to find out why my credit score dropped

The smartest move you can make is using a free credit monitoring service like Wallethub or Credit Karma. The score you will get from these free services is of no use. But at least you can pull the latest copy of your credit report and discover what caused a drop in your credit score.

There are a few other related questions people often ask me when I explain why their credit score dropped. I am answering those questions here only. If you have similar questions in your mind, then clear your doubts right here.

How to get my credit score up in 30 days

You can raise your credit score in 30 days in the following ways:
  • 1 Check your credit report and find out if there are mistakes like defaults or inaccurate late payments. Notify your creditors and ask them to rectify the mistakes.
  • Here’s the right way to get your inaccurate information removed from your credit report

  • 2 Be an authorized user of a credit card account in good standing to raise your available credit, reduce your debt-to-income ratio, and boost your credit score.
  • 3 Increase your credit limit to raise your available credit line. This can help to boost your credit score.

Other ways to get my credit score up fast

Here are the few other ways to boost your credit score:

  • Make minimum monthly payments
  • Have a good credit mix
  • Lower your debt-to-income ratio

Is it good to pay off the credit card in full?

No. It’s better to pay the credit card bill in full since it can help you lower your debt-to-credit limit ratio and raise your score. Try to pay more than the minimum amount every month.

When can I see the paid off credit card on my credit report?

Usually, creditors update credit report once a month. If you have paid off the credit card immediately after the information has been updated on your credit report, then you have to wait for another 30 days to see the change.

How much my credit score can go up after paying credit card?

When you pay off a maxed out card, your score can increase by 100 points in a couple of months. When you pay a maxed out card, your credit-utilization ratio drops. This helps your credit score to increase.

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