Why does credit score drop after paying off a loan?
In: Other
Credit scores are calculated based on the number, kind, age, and mix of the various accounts you have (loans + credit cards + savings/checking). If you finish a loan:
* You have one less account (and its history) contributing to your score.
* You have a less diverse portfolio
* The average age of your accounts decreases
* Your credit utilization (ratio of currently used credit / max credit) increases because your max credit went down. (For some reason, it looks good if you have a huge credit limit that you’ve barely used, like if you have a credit card with a high limit but you NEVER max it out. Loans count as increasing your max credit limit while you have them.)
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