While paying off your debts often helps improve your credit scores, this isn’t always the case. It’s possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt.
However, that doesn’t mean you should ignore what you owe. The benefits of paying your debts are far greater than the drop that you may see in your credit scores, and the negative impact is likely to be temporary.
Paying off your mortgage and owning your home free and clear is a major accomplishment. But surprisingly your credit score may take a dip when your mortgage balance hits zero. This counterintuitive drop can leave you scratching your head but there are a few reasons it happens. Here’s an in-depth look at why your credit score may go down after paying off your house, and what you can do about it.
How Credit Scores Are Calculated
Before diving into reasons your score may drop, it helps to understand what goes into a credit score in the first place The two most commonly used credit scores are the FICO® Score and VantageScore® While the exact formulas are proprietary, both consider the following general factors
- Payment history – Whether you pay your bills on time. This has the greatest impact on your scores.
- Credit utilization – The percentage of your available credit you’re using. Lower percentages are better.
- Length of credit history – How long your credit accounts have been open. Longer histories improve your scores.
- Recent credit applications – Opening many new accounts in a short timeframe can lower your scores.
- Credit mix – Having different types of accounts, like installment loans and credit cards. More variety helps.
Now let’s look at how paying off your mortgage could negatively affect some of these key factors.
5 Reasons Your Credit Score May Drop After Paying Off Your Mortgage
Here are some of the most common explanations for why your credit score dips when your mortgage balance reaches zero:
1. It Alters Your Credit Mix
Lenders like to see you can handle different types of credit, including installment loans like mortgages and revolving credit like credit cards. If your paid-off mortgage was your only installment loan, losing this type of account weakens the diversity of your credit mix.
2. It Lowers Your Total Available Credit
When you close an account, you lower your overall credit limit across all accounts. This can increase your credit utilization ratio if you carry balances on other credit cards.
3. It Shortens Your Length of Credit History
How long your accounts have been open contributes significantly to your scores. If you close your mortgage after paying it off, you wipe out that account’s entire history. This lowers your average account age.
4. It Results in a Sudden Account Closure
Shutting an installment loan like a mortgage shortly after opening it can signal risk to lenders and negatively impact your scores.
5. Your Scores Were Trending Down Anyway
Sometimes your credit scores may dip coincidentally when your mortgage balance reaches zero. Another factor like a high card balance that month could be the real culprit.
The good news is if your score drop is related to paying off your mortgage, it’s usually temporary. Here are some tips for managing your credit after paying off your house.
4 Tips for Managing Your Credit After Paying Off Your Mortgage
Paying off your home loan is an accomplishment to celebrate, even if your credit score temporarily falters. Here are some ways to manage your credit wisely after zeroing out your mortgage:
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Keep old credit card accounts open – Don’t rush to close unused cards, especially your oldest ones. Keeping them open preserves your credit history length.
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Monitor card balances – Carrying high balances can hurt your utilization ratio. Try to keep balances under 30% of the card limits.
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Apply for new credit judiciously – Limit applications to about once every six months to avoid raising red flags.
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Check your reports – Verify your paid mortgage shows as closed and not delinquent. Dispute any errors with the credit bureaus.
Within a few months, your credit scores should rebound and may even exceed their earlier levels, especially if you continue practicing good credit habits. Paying off a mortgage is a major feat that exemplifies responsible financial management, even if your credit score doesn’t immediately reflect that. With time, your credit will demonstrate the positive impact of no longer carrying this major debt burden.
What elements affect my credit scores?
To better understand why you could see lower credit scores after paying off debt, consider the elements that go into calculating your scores.
Your credit scores are based on information from your credit reports, which are generated by each of the three nationwide consumer reporting agencies (CRAs). The nationwide CRAs — Equifax, TransUnion and Experian — receive information about your lines of credit such as personal loans, credit cards and auto and mortgage loans.
Your credit scores are then calculated based on a formula that determines your creditworthiness, or how likely you are to make your debt payments on time. Credit scores are one factor that lenders may consider when deciding whether to extend credit to you.
There are many formulas used to calculate credit scores. However, most consider the following factors:
- Payment history. Your payment history shows how you have repaid credit in the past. Certain behaviors, such as late or missed payments, can have a negative impact on your scores.
- Length of credit history. Your credit reports track the amount of time your credit accounts have been active. A longer credit history can have a positive effect on your scores.
- Newer lines of credit. Any recent credit accounts you have opened are also taken into consideration when calculating your credit scores.
- Credit mix. Your mix of credit accounts — including loans, credit cards and mortgages — is generally considered when calculating your scores, and a diverse credit portfolio can have a favorable impact.
- Credit utilization ratio. The amount of revolving credit you’re using divided by the total credit available to you is known as your credit utilization ratio and can also have an impact on your scores.
When will my credit scores improve after paying off my debts?
Paying off debt is more likely to help your credit scores than to hurt them. You are likely to see your credit scores improve after paying off debt unless the debt you repaid meets the unique criteria listed above.
My Credit Score DROPPED After Paying Off Car Loan (Why Scores Tank After Auto / Mortgage Payoff)
FAQ
Why did my credit score drop after I paid off my mortgage?
Another factor is the length of credit history. Over time, closed accounts can eventually fall off your report, shortening your average account age. That’s another small ding in the scoring model. Also, your home loan was likely reporting on-time payments every month.
Has anyone gotten an 850 credit score?
Despite achieving an 850 score, Michell found that it had little impact on his financial life, as interest rates and insurance costs remained unchanged.Jan 4, 2025
Why did my credit score go down even though I pay on time?
Maintaining a good credit score is crucial for various financial needs. Your credit score can drop despite paying on time due to factors like high utilisation ratio, reduction in available credit limit, incorrect information in your credit report, or opening multiple new accounts.
How long does it take for credit score to go up after paying off a credit card?
How long after paying off debt will my credit scores change? The three nationwide CRAs generally receive new information from your creditors and lenders every 30 to 45 days. If you’ve recently paid off a debt, it may take more than a month to see any changes in your credit scores.