Why Your Credit Scores May Drop After Paying Off Debt

By Tevait Feanle •  Updated: 03/18/24 •  5 min read

You are trying hard to create a great credit record for yourself. You are also trying to do the right thing for your financial well-being and pay down your debt. Both of these are fantastic goals, and they seem like they should be aligned. Why, then, is your credit score dropping

- ADVERTISEMENT -
as you pay off debt or stop using credit? This is something that puzzles many people. Today, we are here to help you understand why this happens and what to do about it.

Why Your Credit Scores May Drop After Paying Off Debt

It’s a common misconception that paying off debt always results in an immediate boost to your credit score. However, several factors can contribute to a temporary decline in your credit scores after you make a debt repayment. The main reason is the impact it has on your credit utilization ratio. Credit utilization means the percentage of your available credit that you’re currently using. For example, if you have a R10,000 available limit on a credit card, and have used R5,000 of that limit, you have a credit utilization of 50%. When you pay off a significant portion of your debt, your credit utilization ratio may decrease, which can initially cause a drop in your credit scores.

Paying down a credit line to zero will always cause a (temporary) drop, as will closing lines of credit. This affects factors like the length of your credit history and your credit mix as well as your credit utilization.

Why Did My Credit Score Drop After Taking Out A Loan?

Taking out a loan will also cause a (temporary) decrease in your credit score. There are several reasons for this. Firstly, applying for a new loan results in a ‘hard’ inquiry on your credit report, which can slightly lower your score. Additionally, the new loan adds to your overall debt load, increasing your credit utilization ratio and so impacting your score negatively. However, as you make timely payments and show responsible credit behavior, your credit score should gradually improve over time.

Why Would My Credit Score Go Down When Nothing Has Changed?

Even when you haven’t taken on new debt or made significant changes to your finances, your credit score will still fluctuate. There are a few reasons for this, including changes in the way credit agencies calculate your score, the updates to your credit report that result, and even the faint possibility of errors in reporting. 

Mostly, credit scores go down because nothing has changed- you haven’t used your credit, your accounts are getting older but have no significant improvements or issues, payments are slowly reducing your debt load, and you are static in the eyes of the credit bureaus.

Remember, credit reports don’t track financial good behavior overall, only good credit behavior, and that includes using credit, albeit responsibly. Some good financial habits (like using less debt) will hurt your credit profile! Don’t worry about this too much, if you are otherwise well-positioned and have a strong credit report. It’s not a ‘problem’ per se, just a factor of what credit reports do.

- ADVERTISEMENT -

How Long Does Debt Stay on Your Credit Report in South Africa?

In South Africa, different types of credit-based behavior will stay on your report for a fixed period, depending on exactly what that behavior is. Most ‘regular’ debt behavior, like payments (whether missed or on track), hard inquiries, and similar factors, will only impact your credit report for 1 to 2 years. However, some serious types of negative credit behavior, like defaults, will stay on your report for 5 years.

If you are currently under debt review/counseling, your report will be frozen until you exit it. This makes it seem like things are staying on your report longer, but remember that there are considerable benefits to getting help with your debt if you are struggling, and this will work out in your favor when you exit debt review with a cleaned-up credit report. 

How Do I Stop My Credit Score From Dropping?

How do you stop your credit score from dropping? Firstly, remember that it is natural for your score to fluctuate slightly with time, and you can’t always address the issue. If you’ve noticed a very big drop, however, especially if you believe you have done nothing to trigger it, then you may need to pull a credit report from the bureau and check that all the information shown is accurate. If you notice a fraudulent entry or error, you can apply to the bureau directly to have it removed.

If you have recently applied for credit, whether successfully or not, remember that the hard inquiry from the lender will temporarily drop your score, too. This effect will pass with time. Also bear in mind the factors we mentioned above, regarding how paying off debt, reductions in your utilization ratio, and closing credit lines can all cause a temporary drop.

What can you do to start your credit score moving in the right direction again? Firstly, continue to make timely payments on all your debt, as payment history is a significant factor in your credit score. Consider diversifying your credit mix by using different types of credit responsibly, such as credit cards, loans, and retail accounts. Finally, practice responsible financial habits, like maintaining a low credit utilization ratio and avoiding unnecessary credit inquiries, to steadily rebuild your credit score over time.

- ADVERTISEMENT -

Keep Reading

How to Check Credit Scores For International Students

How to Check Credit Scores For International Students

This is why our blog will focus on the South African context, taking our audience through how to check credit scores for international students. 

What Credit Scoring Is Needed For Apartment Renting?

What Credit Scoring Is Needed For Apartment Renting?

What Credit Scoring Is Needed For Apartment Renting?. In this writing, we will answer both queries and share tricks and details for tenants and landlords.

How to Get a Free Credit Score Report

How to Get a Free Credit Score Report

Today we will walk you through everything to know about getting your free credit score report, and what your options are. 

What Is A Hard Inquiry Credit Score

What Is A Hard Inquiry Credit Score

In the end, we should be able to understand the outcomes of hard inquiry and the points to lose. 

How to Repair Your Credit Score Yourself

How to Repair Your Credit Score Yourself

Fortunately, you can fix your credit score to enjoy more benefits, but this process usually takes time. Here are the steps you can take to repair your credit score.     

How Long Does Information Stay on My Credit Report?

How Long Does Information Stay on My Credit Report?

Here’s more in-depth information on how long information stays on my credit report in South Africa, and what you can do about it.

How Many Credit Checks Are Too Many In South Africa

How Many Credit Checks Are Too Many In South Africa

How Many Credit Checks Are Too Many In South Africa. Let us get deeper into the credit check limitation and its associated consequences. 

How to Update Credit Score Information

How to Update Credit Score Information

You may calculate your credit score by looking at your credit history, which includes details such as the number of accounts you have

How To Fix A Bad Credit Score In South Africa

How To Fix A Bad Credit Score In South Africa

We are here today to guide you through it all. So pour yourself a refreshing drink, relax, and let’s fix that credit score together.

How Much Does Pulling Your Credit Affect Your Score?

How Much Does Pulling Your Credit Affect Your Score?

Today we unpack this common question and everything you should know about pulling credit reports. 

How To Cancel Credit Cards Without Impacting Credit Scores

How To Cancel Credit Cards Without Impacting Credit Scores

Similarly, if your gold card company is charging high annual fees, it may be prudent to cancel it. These points will be explained in great detail in the article.

Do Consolidation Loans Hurt Your Credit Score?

Do Consolidation Loans Hurt Your Credit Score?

As we continue to educate our readers, we will be sharing with you a couple of narratives concerning consolidation hurting your credit score and the aftermath of debt consolidation.

What Credit Score Will Prevent You From Getting A Job

What Credit Score Will Prevent You From Getting A Job

What Credit Score Will Prevent You From Getting A Job. This writing looks at the effects of credit grades on job positions

Can Credit Score Improve Through Edgars in South Africa?

Can Credit Score Improve Through Edgars in South Africa?

Can Credit Score Improve Through Edgars in South Africa? Read on to learn how to improve your credit score through Edgars in South Africa. 

How Do You Check Someone’s Creditworthiness?

How Do You Check Someone’s Creditworthiness?