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I Paid Off My Student Loans & My Credit Score Dropped?!

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Paying off a debt is an accomplishment worth celebrating, so imagine how frustrating it would be to see your credit score drop after getting one of your loan balances to zero.

A student loan borrower didn’t understand why a positive financial move would be bad for his credit standing, so he took to Reddit to ask why that might be the case:

“I just paid off $9,000 worth of loans, leaving me with $3,000 left, and my credit score went down 25 points. How does paying off my debts in a timely manner make me a worse borrower (in the eyes of whomever checks my credit score)?”

The poster didn’t provide other details concerning his credit profile, so there could be a variety of reasons his credit score declined. We don’t have the whole picture, but there are two things to point out in this person’s situation: First, credit scores fluctuate constantly, because individual credit use changes from day to day. Second, paying off a student loan doesn’t cause credit scores to drop. He should continue attacking his student loans, because making payments on time is crucial to a good credit history, and the faster he pays them off, the more money he’ll save in interest.

Why Scores Drop

If you check your credit scores regularly (which you should), you’ve probably noticed how the numbers shift often, even if you don’t think your credit profile has really changed. Credit scoring models are highly sophisticated algorithms, so subtle day-to-day data differences manifest in what sometimes seem like significant score changes. Fluctuation is normal: Your credit score is merely a snapshot in time, so what you see on Monday may be different from what a creditor sees on Friday.

Your credit score may increase or decrease for a number of reasons: Perhaps you’re using more of your available credit than you were the last time you checked your score, or perhaps you applied for a new loan in the past six months. There are five main factors that determine your credit scores (explained here), and it all depends on what data is furnished to credit bureaus, as well as when it is reported.

Why Score Changes Matter

A bump or decline in your credit score may not be cause for concern, but that doesn’t mean you should ignore it. If you go through the factors that determine your credit score and can’t think of a reason there would be a significant shift, you may have a bit of a problem on your hands. Unexpected changes in credit scores can be a sign of fraud.

Check your credit card statements to make sure your accounts haven’t been compromised, and review your credit reports and try to find any information that looks inaccurate. Identity theft is a fairly common issue, and while it’s difficult to prevent, it’s much easier to deal with if you’re on top of your credit standing and can act quickly to repair any damage.

You’re entitled to free annual credit reports from the major credit bureaus (here’s how to get them), and you can review your credit data for free with updates every 30 days through Credit.com.

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  • David Mathis

    Actually the same thing has happened to me several times. I see every change to my fico score through myFico. When I pay off a loan my score always drops by 10 points.

    For example I paid off a Star Furniture loan, which was the only change, and my score dropped by 10 points at the same time.

  • Brian Brooks

    This just happened to me also. Paid off remaining student loans ($10K) and my score dropped 25 points. Paying the loan was the only change. Same credit score for years. No other changes to credit history, no missed payments, etc.

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