Why Credit Score Dropped For No Reason: Paying Off Car Loan?

Hey Sunshine,

Are you worried about why your credit score dropped for no reason after paying off car loan? A credit score is made up of mixed scenarios or rules and sometimes you have to figure out what exactly happened.

Maintaining a steady and good credit score can be a difficult task in itself. But sometimes, you might notice that, say, your credit score dropped 100 points after paying off car loan. Here is everything you need to know about improving your credit score by enriching your credit mix.

Paying Off Car Loan 2022: Overview

Your car loan is an installment loan. Hence, paying it off entirely might hurt your credit score. Settling credit card debt or clearing all dues and closing an old account can also have the same effect. If it looks like your credit score dropped for no reason, there are a number of factors for which your credit score might not be steady. It depends on your average account age and credit utilization, rather than simply being about how much debt you have. Check out the multiple ways you can stabilize your credit score.

Reasons Credit Score Dropped 100 Points After Paying Off Car Loan

Right off the bat, it is important to remember that your credit score is a reflection of your capacity to repay loans. However, the way the credit score works depends on various factors. While paying off your loans is a good thing, it can still interfere with the credit score formula and, in turn, your credit score calculation. Here are 3 reasons credit score dropped 100 points after paying off car loan:

1. A Specific Kind Of Loan Got Eliminated

2. Your Overall Credit Utilization Went Up

3. The Average Age Of Your Accounts Was Affected

Credit score dropped 100 points after paying off car
Credit score dropped 100 points after paying off car

1. A Specific Kind Of Loan Got Eliminated

Loans can be of various types. You could have installment debts or revolving debts. Being able to show that you can manage multiple kinds of debts increases your credibility as a loan taker. After paying off car loan, it may remove a certain kind of loan from your records entirely, which can hurt your credit score.

2. Your Overall Credit Utilization Went Up

A low credit utilization will help you to maintain a high credit score. As a rule of thumb, you should utilize more than 30% of your total available credit. If you, say, paid off your credit card debt and closed the account, it will look like your credit score dropped for no reason.

3. The Average Age Of Your Accounts Was Affected

Even if you don’t use it, commitment to an old account is a good sign for your credit score. Settling a revolving debt and closing an old account can reduce the average age of your accounts. This can make your credit score drop for no reason. However, that does not mean you should not pay off your loans. That can also harm your credit score drastically.

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How To Avoid Credit Score Drop: Paying Off Car Loan (2022)

Prevention is better than cure. There are always some things you can do to avoid any mishap with your credit score. Here are some tips to follow to ensure your credit score does not drop when you pay off your car loan.

Pay Auto Loan Without Penalty
Pay Auto Loan Without Penalty
  • Be consistent with your payments. Pay on time, and pay as per schedule. One way to make sure that you never miss a beat would be to set an alarm or a reminder on your phone.
  • Monitor your credit reports very closely. Your credit score relies heavily upon your credit reports. The smallest error in the records indicates incorrect data. Incorrect data could hurt your credit score.
  • Opening a new credit account lowers the overall age of your accounts. So, it might be helpful to keep consequent credit applications at least six months apart. That way, the average age of your credit accounts does not take a hard hit all at once.

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Why Paying Off Your Car Loan Early Hurt FICO Credit Score?

A FICO score is slightly different from a credit score. It does not indicate your exact credit score number, but it does function as proof of your likeliness to display good behavior with respect to debts. Your FICO score indicates your tendency to shoulder fiscal responsibility adequately. It is calculated based on certain parameters.

Paying Off Your Car Loan Early Hurt FICO Credit Score
Paying Off Your Car Loan Early Hurt FICO Credit Score

Your payment history, the amounts owed, length of credit history, credit mix, and new credit are all factors that go into your FICO score calculation. Paying off your car loan can interfere with the formula for calculation. By clearing an auto loan, you are erasing a line of credit from your credit mix, hence causing your FICO score to drop.

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How To Increase Your Credit Score After Paying Off Car Loan?

If you have noticed that your credit score dropped a 100 points after paying off car loan, here are some things you can do to prop it back up.

Credit Score After Paying Off Car Loan
Increase Credit Score After Paying Off Car Loan
  • Maintaining a good credit payment record is the first thing to focus on. Failing to follow the designated payment schedule is going to negatively affect your credit score further.
  • Make sure you have both installment debt and revolving debt in your credit loan. Revolving debts hold more weightage in your credit score. A diverse credit portfolio can pump your credit score up.
  • Applying for new, affordable, low-interest credit can prove immensely helpful.
  • Lowering your credit utilization ratio by reducing the difference between your amounts and the credit limit is another way to amp up your credit score.

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Credit Score Dropped For No Reason: Pay Auto Loan Without Penalty

Avoid Credit Score Drop
Avoid Credit Score Drop

If it looks like your credit score dropped for no reason, maintaining a healthy credit mix is going to be the ultimate weapon. The debt amount in the case of credit card debt changes from month to month. On the other hand, the debt amount for, say, a car loan installment remains fixed. You can do this by making sure that you have both revolving debts, like credit card debt, as well as installment debts, like a car or home loan, in your credit mix at all times. That way, you will not be penalized for paying your auto loan off.

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Conclusion: Credit Score Dropped For No Reason

If it looks like your credit score dropped a 100 points after paying off car loan, just remember that it is not a system anomaly. The credit score calculation formula is affected by loan repayments, but it is nothing that can’t be fixed! Focus on regular payments of your existing debt and work towards diversifying your credit portfolio.

Frequently Asked Questions

FAQ 1: Why did my FICO score drop after paying off car loan?

Answer: A car loan is an installment loan, which means you have to keep paying it on a monthly basis. Paying off a car loan means that you no longer have an installment loan on your portfolio, which is hurting your required mix of both revolving and installment loans to maintain your credit score.

FAQ 2: Why does paying off a loan hurt credit?

Answer: You need a mix of installment and revolving loans to balance your credit score and keep it from plunging. Sometimes, paying off a loan can disbalance the credit mix.

FAQ 3: Why paying off loans on time drops your credit score?

Answer: Paying off loans on one hand vouches for your credibility in terms of loan repayment. But it can also remove installment loans from your personal record, which can hurt your credit score. Since you haven’t done anything wrong, you can use low-interest personal loans to remedy the situation.

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