Why does credit score drop after paying off a loan?
In: Other
The point of a credit score is to determine the risk of you not paying back a loan on time. Legally, credit score is not allowed to include your income or employment status. However, those are obviously important factors in determining your credit risk.
Their kludgy workaround is to use your monthly debt payments to extrapolate what your income might be that month. When some or all of that debt payment goes away, their calculations get thrown off and they lower your score to account for the (small) chance that you lost income that month. After a few months of on-time payments on your remaining loans, they realize that you never lost income and your score recovers.
Latest Answers