Why does paying off your debt lower your credit score?
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A credit score is not particularly useful. One of the things it’s used for is to try and estimate your income in situations where a lender doesn’t/can’t verify your income.
If you reliably pay $1000 worth of debt each month without incurring any additional debt, then the credit bureau knows you have at least $1000 of disposable income.
Once you completely pay off a debt, you may only be paying $500 each month, so the bureau no longer knows how much disposable income you have. Maybe it’s still what it was before, maybe it dropped, maybe it went up, who knows? This uncertainty causes your score to drop.
It’s not really anything worth worrying about though because for anything important like a mortgage, the lender will actually verify your income. That means they will know that your disposable income actually went up once your monthly debt payments went down by $500/month, which means your ‘mortgage score’ will go up.
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