Why your credit score can drop after paying off a loan

Your credit score can drop after you pay off a loan because FICO treats an installment loan that is actively being repaid, and mostly paid down, as a sign of lower risk. When you pay off your only open installment loan, that signal disappears. FICO says its research on millions of credit files found that people with no active installment loans default more often than people repaying one. The drop is usually small, it fades as the rest of your file keeps reporting on time, and paying off the loan is still the right move in almost every case.

What FICO says causes the dip

FICO’s own explanation names two situations:

• You paid off your only active installment loan. Car loans, student loans, personal loans and mortgages are installment loans. With none open, your file shows only revolving accounts, and FICO’s data says that profile carries slightly more risk.
• You paid off the loan that was most paid down. If you have several installment loans, the one with the lowest balance relative to its original amount helps the most. Closing it leaves the newer, less paid-down loans, so the average looks worse even though your total debt fell.

Both effects sit in two categories: credit mix, which is 10% of a FICO score, and amounts owed, which is 30% and includes how much of your installment debt you have paid down. FICO also notes that it is possible to score in the upper 700s and higher with no installment loan at all, which tells you how modest the effect is.

What does not cause it

The account does not vanish. A paid-off loan stays on your report as closed and paid as agreed, and Equifax says accounts like that can stay for up to 10 years. During that time it keeps counting toward the length of your credit history, so the age of your accounts does not drop the month you pay it off.

It is also not a penalty for paying early. FICO does not know or care whether you paid on schedule or ahead of it; it sees a closed, paid account either way.

Paying off versus keeping the loan: the math

Suppose you have $5,000 left on a personal loan with an APR of 12% and 24 monthly payments to go. These are illustrative figures. Keeping the loan means 24 payments of $235.37, or $648.82 in interest still to come. Paying it off today saves that $648.82. For context, this is the Federal Reserve’s average APR on 24-month personal loans at commercial banks:

A few points on a score you are not using for anything are worth nothing. Keeping a loan open to protect them means paying real interest for a number that will recover on its own as your other accounts report on time. Pay it off.

The one exception: a mortgage in the next few weeks

The exception is narrow: you are about to apply for a mortgage, and the loan has only a few payments left anyway. Here a small score change can cost money, because mortgage pricing moves in 20-point tiers. In Fannie Mae’s 2026 loan-level price adjustment matrix, for a purchase loan with a loan-to-value of 75.01% to 80%, a score of 780 or higher carries an adjustment of 0.375% of the loan and a score of 760 to 779 carries 0.625%. On a $350,000 loan, that is $1,312.50 against $2,187.50: crossing one tier boundary costs $875, usually built into your rate or closing costs. See what score is good enough for the full tier picture.

Before you decide to keep paying a loan through your mortgage closing, check the other side of the ledger: your debt-to-income ratio. Under Fannie Mae’s Selling Guide, an installment debt with ten or fewer monthly payments left does not have to be counted in your debts, unless it significantly affects your ability to pay. A loan with 30 payments left counts in full. So the order of questions is:

1. How close is your score to a tier boundary such as 740, 760 or 780? If it sits comfortably in the middle of a tier, a small dip changes nothing, so pay the loan off.
2. How many payments are left? Ten or fewer usually means the payment drops out of your debt-to-income ratio anyway, and keeping the loan a few more weeks costs little.
3. What does your loan officer see? Ask them to run the numbers both ways before you send the final payment. Some lenders can also show you how a payoff would change your score.

The lender cares about debt-to-income ratio as much as the score; the CFPB’s explanation and our debt-to-income guide show how it is calculated.

Cards work the other way

Paying down a credit card balance usually raises your score quickly, because it lowers your utilization, the ratio of card balances to limits. The score risk with cards comes from closing the account afterward, which removes its limit from the calculation; that is covered in what closing a card really costs. Paying a card to zero and keeping it open is almost never a mistake.

If your score dropped after a payoff and you want to confirm the reason, pull your reports at AnnualCreditReport.com and check that the loan shows as closed, paid as agreed, with a $0 balance. A loan reported as still open with a balance, or with a late mark you do not recognize, is an error you can dispute.