You Paid Your Car Off. Why Did Your Credit Score Go Down?
- Brandon Brown
- 2 days ago
- 3 min read
Don’t panic.
It’s a huge moment. You made the final payment and paid off your car. That weight is lifted off your shoulders, and you’ll soon have the title in hand. You now have the freedom of some extra cash without a monthly payment holding you back.
Naturally, you get an email or a push notification, expecting a nice credit score increase for your financial discipline.
But it dropped. Maybe by 5, 15, or even 20 points.
That’s when the confusion and frustration become real. You did the responsible thing, so why does it feel like you’re being penalized? Before you get even more frustrated, know this: it’s a common and usually temporary quirk of the credit scoring system. Let’s break down why this happens.
The “Why” Behind the Drop: Understanding the System
Credit scores are calculated by algorithms. Paying off your car loan is a major change to your algorithm, and the system needs a moment to adjust your profile.
To dive a little deeper, many auto lenders don’t just use your base credit score. They often pull an industry-specific score, like the FICO Auto Score, which is specially designed to predict risk on a car loan. This specialised score holds more weight to your past performance with auto loans, which is another reason paying a car off can cause such a noticeable shift.
Here are the three main reasons for the score dip:
Your “Credit Mix” is Now Less Diverse
Credit scoring models reward you for successfully managing different kinds of debt. They like to see both installment loans (like your car loan, with fixed payments for a set term) and revolving credit (like credit cards). If that auto loan was your only installment loan, your credit mix is now 100% revolving credit, which the algorithm sees as less diverse.
2. You Closed an Active, Positive Account
Think of your on-time car payments as a monthly check-in to the credit bureaus. For years, you were actively demonstrating your ability to repay the car loan debt as agreed. When you pay off your car loan and the account is closed, that steady stream of positive, active reporting stops. The payment history is still on your report, but it’s no longer an active account, which can cause a slight dip.
3. A Small Change in Your Average Age of Accounts
This factor here is less impactful but still plays a role. The closed car loan will stay on your credit report for up to 10 years, continuing to help the overall age of your credit history. However, most scoring models also look at the average age of your open accounts. When your car loan closes, it can sometimes lower this specific average, causing a minor score decrease.
Your Next Move: How to Keep Your Score Strong
The good news is... that dip is almost always temporary. As you continue your other good habits, your score will recover and climb. Here’s how to help it along:
Keep Credit Cards Open: Especially your oldest ones. Their long history is a major asset to your credit age.
Use Cards Lightly & Wisely: Make small purchases on your credit cards and pay the statement balance in full every month. This shows active, responsible credit use.
Keep Credit Utilization Low: A golden “credit rule” is to keep your balances below 30% of your credit limits. Under 10% is even better for your score.
Monitor Your Report: Not every day, but check your credit report at least once a month, or two, to ensure the auto loan is correctly marked as “Paid and closed.”
Understanding how auto loans affect your credit is crucial, whether you’re celebrating a payoff, planning to refinance, or getting ready to buy your next car. These are major financial decisions where a few credit score points can mean saving thousands of dollars.
If you want expert guidance on managing your credit before, during, or after an auto loan, I can help. Let’s come up with a strategy that puts you in the driver’s seat of your financial future.
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