Why Paying Off Your Car Loan Caused Your Credit Score to Drop

When you finish paying off a car loan, you might expect your credit score to go up, right? However, sometimes your score might take a hit, and here's why that can happen.
 

How Paying Off a Loan Affects Your Credit Score

Finishing up your car loan payments turns that account from "active" to "closed" in your credit history. This change can affect two things about your credit score:
 

• The Length of Your Credit History: Part of your credit score looks at how long you've been borrowing money. 
• Your Credit Mix: Credit scores also consider the kinds of credit you use. Lenders like to see a variety, such as credit cards, personal loans, and car loans. Paying off your car loan meant you had less variety in your credit mix.

Must Read: What Credit Score Do You Need to Buy a Car?
 

Understanding The Drop

Even though paying off a loan is a good thing and shows you're responsible, the way credit scores are calculated can mean a slight drop in your score when a loan is fully paid. 

This drop happened because my car loan, which had been positively affecting my score, was no longer active. This doesn't mean it's bad to pay off loans! 

It just means the credit scoring system focuses on active loans and debts when calculating your score.
 

Why You Shouldn’t Worry About The Drop

Despite the small dip in my score, don’t be worried. Here's why:
 

• Expertise and Expectation: you have to understand that the drop should be expected after paying off the loan.
• Excellent Credit: If your credit score is high enough, the drop shouldn’t affect your score harshly.
• No More Payments: you no longer have to make monthly payments and you saved enough money in interest by paying off the loan early. Now, you own the car outright.

Check Out: Easy Ways to Snag a 0% Car Loan

In short, while your credit score experienced a small decrease after you paid off your auto loan, the benefits of owning your car free and clear far outweigh the minor impact on your score.
 

Debt Relief Options

Taking on a car loan can sometimes feel overwhelming, especially if you’re already navigating other financial responsibilities.

If you find yourself struggling with debt after purchasing your new vehicle, it’s important to know there are options available to help you regain control.

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