Credit Score

Why Did My Credit Score Drop After I Paid Off My Balance?

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We recently received the following question from a reader about why her credit score would drop after paying off a credit card balance:

A month or so ago I got my credit score. It was 812. Today I received an email saying there was an update to my score so I logged in to see the change. My score is now 800. The only thing different is I paid off one of my credit card balances. Should I keep a balance? This doesn’t make sense why it would go down. Nothing else has changed.

As lenders report updates to the credit reporting agencies and your credit report changes, it’s not uncommon for credit scores to fluctuate a few points from month to month. And for high scorers like yourself, a fluctuation of 12 points is very minor. However, to answer your question — paying off a credit card balance wouldn’t lower your credit score unless you closed the credit card when you paid it off. In fact, paying off (or paying down) a credit card balance would have the opposite effect.

There are a number of reasons why a credit score would drop: a negative item that wasn’t reported in the past, higher balances on credit cards, new account openings, new inquiries — or a combination of these things. It’s easy to speculate what may have caused a score drop but in the end, the only way to truly know what caused a score to drop is to compare the credit reports used to generate the score for each.

I know you mention that nothing else changed but if your score dropped, something in your credit report changed. The free monthly updates from Credit.com’s Credit Report Card only include changes in your score so unless you ordered a full credit report, it’s impossible to know what caused the 12-point drop. (You can get your credit reports for free once each year from each of the three credit reporting agencies.) Having said this, there are a few other factors at work here that I think may ease your mind and explain the slight drop.

Paying a credit card balance in full doesn’t necessarily mean your credit score will reflect your most recent credit card payment. This is because credit card issuers generally report updates to the credit reporting agencies once every 30 days, typically around the time that your monthly statement drops. For this reason, the balance reported in your credit report would show the balance from your most recent credit card statement. And if your most recent statement balance was higher than the previous month’s statement balance (when your score was 812), it would cause your score to drop. So you’d have to stop using your credit card for at least a month before the balance would be updated and reflect a $0 balance in your credit reports.

In the grand scheme of things, a slight fluctuation isn’t something to be overly concerned with — especially with scores as high as yours. Scores in the 800+ range are golden in the financial world and will get you the best deals that lenders have to offer, which, after all, is one of the best reasons for maintaining great credit.

For more about credit reports, credit card management and improving your credit scores, check out these great resources:

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  • http://www.credit.com/ Credit.com Credit Experts

    If you can keep the accounts open, the zero balances will def. help your revolving utilization. It’s also a good idea to use the cards for small purchases every now and then (and then pay the balance in full) just to keep the cards active so that your issuer doesn’t close them due to inactivity. If you want to close the cards, how it will impact your credit scores will really depend on several factors but the largest variable is how it will impact your revolving utilization. For a more detailed look at whether or not it’s a good idea to keep a credit card account open with a zero balance, the following article will help: I Have Too Many Credit Cards. What Do I Do?

  • Katydid

    Does it help our credit score to pay off our credit card balance before the statement drops, or should we wait until the statement drops to pay off the balance? We have no other debt, and we are using the card just to have an active credit score in order to purchase a house later.

    • http://www.credit.com/ Credit.com Credit Experts

      Katydid – The goal is to keep the balance as low as possible so that your revolving utilization percentage is low (which is good for your credit scores). Having said this, the balance reported in your credit reports is typically the balance that’s listed on your monthly statement. (Creditors typically report once a month, usually around the time your monthly statement drops.) If you want the balance to be reported as “zero”, you’d pay the balance just before the credit card issuer sends their update to the credit reporting agencies. If this is a big concern, and you want to know for sure, you may wish to contact the credit card issuer to find out when they report your monthly updates to the bureau so that you can time your monthly payments accordingly.

      If your balances are low (10% or less of the credit limit), I wouldn’t really worry about this too much. As long as the reported balance is under 10%, you’ll do very well in this category of the score calculation. For more on revolving utilization, how it’s calculated and what credit score models are looking for, the following resources should help:

      The Ultimate Guide to Credit Scores
      5 Things That Make Up Your Credit Score
      How to Calculate Your Credit Card Utilization (I Have Too Many Credit Cards, What Do I Do?

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  • http://www.credit.com/ Credit.com Credit Experts

    Scores fluctuate — often changing daily or more often. Small point changes, like the one you describe, shouldn’t be anything to worry about. We wrote about it here: Making Sense of Your Credit Score. It sounds as if you are checking your scores regularly — that’s a good habit to be in, but there’s no reason to worry about small fluctuations. Here’s how to monitor your credit score for free.

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