Why Paying Off a Loan Can Make a Credit Score Drop Instead of Rise

A paid-off installment loan can sometimes cause a temporary credit score decline because the account no longer counts as an active installment account, even though its positive payment history may remain on the credit report – Shutterstock

Paying off a loan can leave you with less debt, one fewer monthly bill, and a credit score that suddenly moves in the wrong direction. That sounds backwards because eliminating debt represents a real financial accomplishment. Yet credit scoring models do not judge your finances the same way a person does.

The surprise usually involves an installment loan, such as an auto loan, student loan, mortgage, or personal loan. Once the final payment closes your only active installment account, certain scoring models may lose information about how you manage that type of credit. FICO specifically notes that paying off the last active installment loan can cause a score drop.