Finally, being able to pay off that debt that has been burdening upon you for a long time is always a huge wave of relief (and freedom!). The straight equation in our minds makes us happy to think that now that you have paid off your debt or ensure credit card debt relief, your credit score will surely rise, isn’t it? After all, you have been a good customer and returned all the dues. But for those of us who have been there, know the shock! That pang in our hearts when our credit score drops after just having all the debt paid off!
Why does your credit score drop after paying off debt?
To better understand why our credit score drops immediately after paying off a debt, we first need to understand how it all works in the first place. There are primarily two credit-scoring sources: FICO and Vantage Score. Each one of these has their own unique systems and the lenders also have their own algorithms but on an average scale, below is FICO’s structure:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Next, let’s talk about the Vantage Score’s structure and what importance each factor holds:
- Amounts owed: Extremely influential
- Credit mix: Highly influential
- Payment history: Moderately influential
- Length of credit history: Less influential
- New credit: Less influential
How to improve your credit score?
If you have a credit card(s) always make sure to pay their balances off first as these cards tend to have more higher interest rate than the loans. Also, it’s important to keep in mind, the lower is your balance from limit the better.
Here are other habits to keep in mind:
- Never make late payments
- Don’t close your credit accounts unless really needed.
Overall, your credit score might go down a little after immediately paying off long-term debt but don’tworry as following these will surely help with your credit card debt relief.