Why does credit score drop after paying off a loan?
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Credit scores factor in a lot of things like the average balance of your accounts, average age of your accounts, payment history, etc. If you’ve opened up new accounts and paid off a loan you had for a very long time, it can hurt your credit score because you don’t have a long payment history on your current accounts. It makes it look like you’re a riskier debtor. Credit scores also reward you for having a mix of revolving accounts which are accounts like credit cards which don’t have set payment schedules and installment accounts which are accounts with a fixed loan amount that you pay a set minimum every month. If you close an installment account and all your remaining accounts are credit cards, it looks bad to a creditor.
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