Why Did My Credit Score Drop After Paying Off Student Loans? (2024)

FAQs

Why Did My Credit Score Drop After Paying Off Student Loans? ›

Your payment history is perfect and you keep credit card balances low. But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip — even though you did exactly what you agreed to do by paying off the loan.

It Could Change Your Credit Mix

If you have both revolving credit (like credit cards) and an installment loan (like a student loan), paying off your student loans will shift your credit mix. This could negatively impact your FICO score.

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

As long as your loans were in good standing at the time they were discharged and your accounts are being reported properly to the credit reporting bureaus, you won't see a huge difference in your score. On the other hand, you could see your score drop if your account wasn't in good standing prior to the discharge.

Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed. However, if you are certain it is for no reason, check to be sure there is not a mistake in your credit reports or that you're not a victim of identity theft.

For some people, student loan forgiveness could actually lead to a higher credit score. That's because eliminating up to $20,000 in debt could constitute a major decrease in your total debt balance, which accounts for 30% of your FICO score.

Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.

It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.

Reasons why your credit score could have dropped include a missing or late payment, a recent application for new credit, running up a large credit card balance or closing a credit card.

What is the downside to student loan forgiveness? ›

Opponents contend that the cost of such forgiveness would be much higher than the benefit to the economy, would disproportionately benefit higher-income Americans, and would only offer a temporary reprieve before total outstanding student debt rose again.

Paying off a loan isn't reflected in your credit scores. But it does improve your overall financial picture by reducing your debt-to-income ratio. That may help you qualify for or get a better rate on a home or auto purchase.

Since student loans are a type of installment credit, having them on your credit report adds to your “credit mix,” which makes up 10% of your score calculation. This is good for your credit since it adds variety to the kind of loan products you have and shows you can manage different types of debt.

For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2022, the average FICO^® Score^☉ in the U.S. reached 714.

The credit bureaus may have different information.

And a lender may report updates to different bureaus at different times. So, it's possible that Equifax and TransUnion could have different credit information on your reports, which could lead to your TransUnion score differing from your Equifax score.

When your score is 750, you can rest easy that you will qualify for most financial products and get among the very best rates on them. A 750 credit score is considered excellent on commonly used FICO and VantageScore scales, which range from 300 to 850.

When you make that final payment on your student loan, you might see a brief drop in your credit score — especially if you don't have any other forms of credit on your report. Your score should recover in a few months. You could also see a small increase after paying it off, according to Experian.

In terms of payment history, information about loan payments and certain loan statuses may remain on your credit for up to 10 years even after the loan account is closed and the loan is paid off completely.