So, your credit score dropped after paying off debt.
You must be wondering, What gives?
When you pay off debt, it seems like a given your credit score would go up.
After all, credit scores are supposed to show your ability to manage debt responsibly.
But sometimes the opposite happens.
When you pay off debt, you may actually see yourcredit scorefall in the short term.
All Smart Credit Card Users:
Debt can get out of control fast.
(Inflation, amiright?)
That doesnt mean you have to let your debt run your life.
Your score predicts how likely you are to repay debt.
But sometimes credit score math defies logic.
Here are four reasons your credit score can drop after you pay off debt.
You Reduced Your Overall Credit Limit
Paying off credit cards before other debts is almost always a savvy move.
Credit cards are typically your highest-interest jot down of debt.
Paying them down reduces yourcredit utilization ratio, which is the percentage of open credit youre using.
It determines 30% of your FICO score.
(Paying off a loan or a mortgage doesnt lower your credit utilization.)
So unless the card carries an exorbitant fee, youll want to keep it open.
Scoring models like to see that you could handle a long-term relationship with credit.
Your average age of credit accounts for 15% of your credit score.
That certainly doesnt mean you should avoid paying off a loan just to keep the account open.
Heard of These Credit Card Debt Tips?
But millions of Americans overlookthese easy tipsthat could help them manage credit card debt even more wisely.
Read moreto boost your credit knowledge and keep your credit score in check.
Another Factor Is to Blame
Credit score fluctuations are completely normal.
Any dip in your score will probably be temporary.
Most people see their scores recover within a few months.
One important consideration is your debt-to-income ratio, which will probably be lower after you pay off debt.
The bottom line: Never hang onto debt just because youre worried about the impact on your credit score.
Paying off debt is a good thing, regardless of what your credit score says.
Robin Hartill is a certified financial planner and a former senior writer at The Penny Hoarder.
