Why did my credit score drop after paying off my car?

You’d think paying off debts would increase your score. In the long run, this is true. But the reason you see a score drop after the payoff is that the average age of your credit accounts reduces once you pay off any loan. Length of credit history accounts for 15% of your FICO® score.

Additionally, since the car loan is an installment loan, it adds to your credit mix. If this is the only type of credit account you have other than credit cards, your score gets lower because your credit mix reduces. The credit mix is 10% of your FICO score.

This score drop is temporary and can be recovered soon. It also opens up opportunities for a different type of installment loan so you can maintain your credit mix. In the long run, paying off your car loan will reflect positively on your payment history and lenders will look at you as a more favorable borrower.