Paying Off Debt Can Temporarily Lower Your Credit Score. Here’s What to Watch

Paying off debt can initially lower a credit score, according to Business Insider, because debt accounts help shape several parts of credit-score calculations. The article emphasizes that a drop caused by paying off debt is typically temporary. For many borrowers, the bigger financial benefit is reducing debt payments and moving closer to being debt-free.

Business Insider highlights three common reasons a score may fall: a reduced credit mix, a shorter average credit history, and less available credit after closing a card. FICO score categories cited in the article include payment history, amounts owed, length of credit history, credit mix, and new credit. The takeaway for readers: before closing long-held accounts or canceling cards after payoff, understand how that decision may affect available credit and account age.

When traditional repayment is not manageable, the article says debt settlement and bankruptcy can affect credit in different ways. Debt settlement involves working with a debt relief company to negotiate with creditors, while bankruptcy can remain on a credit report for seven to 10 years depending on the type. Business Insider notes that Chapter 7 bankruptcy stays on a credit report for 10 years, while Chapter 13 stays on a report for up to seven years.

Borrowers paying down debt on their own may not need to worry much about a temporary credit-score dip. The article urges more caution when considering debt settlement or bankruptcy because those options involve more significant tradeoffs. If a debt-payoff strategy could affect credit access or long-term financial plans, Business Insider suggests consulting a financial advisor.