After paying off a loan, it is logical to assume that your credit score would improve. As counterintuitive as it may sound, it is not uncommon for your credit score to decrease after you make the final repayment on your loan.
The important thing to understand is that it is always good to pay off your debt in full. If paying off a loan hurts your credit score, it is usually just a side effect of how credit is calculated.
The following will explain why your credit score may have dropped after paying off a loan.
Your credit score is determined based on your credit report. Your credit report is prepared by a credit reporting body that uses an algorithm to assess your current personal and financial information.
The information in your credit report covers a wide range of areas such as employment and residential information, loan payment history, and information regarding any court judgements against you. The credit report covers all the information considered relevant to how reliable you are when it comes to managing debt.
The credit bureau’s algorithm takes all this information and gives you a score that fits into a certain band (normally ranging from “below average” to “excellent”).
Based on what we understand about how credit scores are calculated, why would paying off a loan reduce your credit score?
If you are paying off a mix of revolving credit accounts (credit card debt) and instalment accounts (instalment loans), it can be healthy for your credit score since you are managing multiple accounts. If you only had one instalment account that you have now paid off, it can cause a temporary drop in your credit score since you are no longer managing a mix of different types of accounts.
The balance (what you owe) of all your accounts also affects your credit score. If the loan you have paid off was your only low balance, then you will only have high-balance accounts left over, which can lead to a temporary drop in credit score.
If you have managed an instalment loan for a long time, it looks good on your credit report. When you pay off your loan, that long-standing account is closed, which reduces the average age of all your accounts, and this can lead to a credit score drop.
Alternatively, the credit score drop could be completely unrelated to the fact you just paid off a loan. There could be several other factors that have recently changed with regards to your credit report that will influence your credit score.
Each lender has their own process for submitting information to credit bureaus. It can take between one to two months for your loan repayment to be reflected in your credit score.
Your credit score reflects how well you manage debt. It follows that managing your debt well will ensure your credit score remains in good standing.
Any credit score drop you experience after you repay your loan will be temporary. Making all your repayments on time and paying off a loan in full reflects good debt management and will be beneficial for your credit score in the long run.
AWhile it defies common sense for your credit score to drop after paying off a loan, you should not hesitate to complete your repayments and close the account.
If you have just paid off a loan and your credit score has decreased, Cash Train can still issue you with a personal loan ranging from $2,001 to $10,000. The approval process carefully considers the circumstances of every customer, meaning that you can still get approved for a loan even if you have an adverse credit score.
If you pay off a loan with Cash Train, you can take advantage of your existing relationship with us to apply for more short-term finance as needed. Because you have already paid off a loan with us, we will not need to perform as many checks to assess your suitability.
As a responsible short-term lender, Cash Train is obligated to check if you have had any change in circumstances when assessing additional loan applications.