How Credit Scores Can Drop after You Pay Off Credit Cards

Paying off your credit card balances won’t affect your credit score. The opposite is true. Although it may take up to a month for your credit score to reflect your paid-off credit card balances, this usually results in a score increase if your other credit accounts are in good standing.

However, there are some instances where your score could drop. Here are some reasons you may have noticed a decline in credit scores after paying off a credit card debt.

What caused my credit score to drop after paying off a credit card?

If you close a credit card after the balance reaches zero, your score could have fallen. Although paying off the card and closing it may have been your goal, this could negatively impact your credit score. It’s best to keep your credit card accounts open, even if you don’t use them often. (Learn more below.)

Your credit utilization rate will increase if you close a credit line. This is the amount of revolving credit you have at any given time. Experts recommend keeping your utilization under 30% to protect your credit scores. Keep it below the single digits to ensure the best possible credit score. Your credit score could be affected if you close a card.

Let’s take, for example, three credit cards with a credit limit totaling $12,000. Your combined credit limit is $4,000. You pay off one card’s balance and then close the other. Your credit utilization will increase from 12.5% to 37.5% if you have $1,500 in total balances on the two other cards and keep that balance after closing your third card.

It is better to keep the third credit card open but not use it excessively, so you can still benefit from its credit limit and avoid adding debt.

What is why my score hasn’t changed after I paid off my credit cards?

After paying off your credit cards, your score will not be updated immediately. This can be disappointing if you have worked hard to reduce your balance. You will probably see an improvement in a short time, assuming all else is equal.

Experian and other credit bureaus receive new information from credit card issuers after your billing cycle ends. If you pay off your balance on April 10, but your billing cycle ends April 30, credit bureaus won’t get that information until at most three weeks after you’ve made the payment.

Credit scoring models (FICO (r) or VantageScore (r)) may not immediately update your credit score, so they can also note if you have taken on additional debt. This would also reflect in your credit score. Allow at least two months for your credit score to be recalculated after paying off the balance.

Do I need to close an unused credit card after paying it off?

Short-term, closing an unutilized credit card account can cause a drop in your score because of the changes in credit utilization. If you close your account in good standing and make no late payments, your account will be on your credit report for 10 years. You’ll also continue to enjoy the benefits of your past positive payment history.

Even though closing an account can hurt your credit, it will likely rebound over the long term if all your bills are paid on time across all credit accounts, and you don’t take on any new debt. If you believe that closing your credit card will prevent you from accruing more debt, this can be a relief. If the card has a high annual cost that you cannot afford or prefer not to pay, you may choose to close it.

There are other reasons your credit score may have dropped.

Although paying off credit cards can lead to an increase in score, other credit activities could reverse those gains or cause a decrease in your score while waiting for the credit card issuers to report your debt to the credit bureaus.

A late payment or missing payment on a loan or credit card can have a significant impact on your credit score. This is because payment history accounts for 35% (r) of your FICO score. As time passes, the delinquency effect on your score is greater. A payment that is 90 days late will have a greater impact on your FICO Score than one that is 30 days late.

Your score can be affected by new credit applications, such as a private student loan or mortgage or credit card, and may also show a slight dip. These applications can create Hard inquiries on credit reports. This means that a lender has requested access to your credit file to assess your creditworthiness. Hard inquiries can affect your credit score for up to two years and usually lower your scores by less than five points.