Man showing credit cards in wallet.

Can Paying Off Debt Hurt My Credit Score?

Patrick Chism4-minute read
September 20, 2020

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The short answer is “no.” Paying off a credit card debt (i.e. a revolving loan) or a mortgage or car debt (i.e. installment loan) early will not necessarily hurt your immediate credit score. In the case of paying off a credit card balance, doing so can actually improve your credit score, since it lowers your credit utilization score (i.e. the amount of available credit you can use).

That said, while paying off a mortgage or car loan early will not significantly lower your credit score, it could lower it a little and can negatively impact your long-term creditworthiness. In other words, it’s complicated.

Here’s everything you need to know before paying off debt early.

Revolving Loans Versus Installment Loans

Before paying off debt, you need to understand the difference between a revolving account (such as a credit card) and an installment account (such as a mortgage or car loan). Paying off the former is almost always a good thing since it lowers your credit utilization. This is the amount of credit you’re using; the lower the better. When you pay off your credit card, the credit amount is still available to you and not automatically closed (i.e. “revolving”).

An installment account such as a mortgage or car loan is, however, automatically closed after paying back the balance. When that happens, a future lender may frown upon your creditworthiness – they want steady repayments with interest, not early payments with less interest. Although the latter is better for you, the former is better for them. So they’re more likely to lend money to slow and steady installment payers over “pay off early” ones.

In some cases, installment lenders might even impose early repayment penalties. And sometimes your credit score might drop a little after paying off an installment loan early, although most research indicates it’s rarely a significant drop.

Why Did My Score Drop When I Paid Off Debt?

Your score could drop because you paid off an installment (i.e. non-credit card) account early, which automatically closes your account prematurely. Doing so may be frowned upon by lenders because it reduces their ability to earn interest from you – after all, it’s how they make their money. It also reduces the number of accounts and types of accounts you have open, which is something lenders like to see. As such, your score might be lowered a few points by paying off an installment loan early.

That said, most agree that doing so doesn’t result in a significant or seriously damaging drop. While it may affect your credit worthiness a little, it would be a bad idea to stretch your loan out and pay more interest in the long run just to save a few credit score points.

In most cases, it’s better for your long-term creditworthiness to pay back installment loans on time instead of early. But paying off an account early once in a while wouldn’t negatively affect your credit. Paying off every installment account early, however — something most of us are financially unable to do — is certainly discouraged.

How Long Does It Take For My Credit Score To Go Up After Paying Off Debt?

While there’s no exact time frame, recovering from a slight dip in a credit score after paying back an installment loan early will probably only take months, not years. In the meantime, there are some things you can do immediately to help boost your score:

Pay Bills On Time, Every Time

Next to having patience, this is the single best thing you can do to improve your credit score and stay in good standing with lenders.

Pay Off Credit Card Debt First

Unlike paying off installment debt early, paying off credit card balances early actually increases your credit score, since it doesn’t automatically close your account, and it actually frees up the amount of credit you can use, which lenders like.

Keep “Well-Aged” Installment Accounts

That means paying back mortgage and car loans for the full term amount, rather than early. This shows a good and longer credit history with open accounts, which lenders like to see. In short, closed accounts with late payments stay on your credit report for 7 years, whereas closed accounts in good standing that were paid as agreed will stay on your credit report for up to 10 years.

Avoid Early Repayment Penalties

Before making an extra house or car payment, check the terms of your loan to see if there are any penalties for doing so. If not, ensure that the extra payments go towards “principal” only instead of interest payments.

Know What Lenders Look For

Credit scorers like good payment history, reasonable credit utilization (30% or less), a history of past accounts, a mix of credit types, and how many recent credit applications (if any) you've applied for. If you can keep those in check, you’re well on your way to improving and keeping a good credit score.

Bottom Line

It’s better for your credit score to keep open and diverse loan accounts, whether they’re for revolving credit cards or installment mortgages or car loans. While paying off credit cards early doesn’t close accounts, paying off installment accounts does. So think twice before paying back home or car loans; ensure there aren’t any penalties for doing so; and don’t get in the habit of paying back installment loans early if you want favorable access to credit in the future.

Need additional help with your credit score? Visit Rocket HQSM for credit, finance advice, and money-making tips from trusted advisors.

Rocket HQSM has partnered with CardRatings for our coverage of credit card products. Rocket HQ and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

Patrick Chism

Born and raised on a farm in the Ozarks, Patrick has a knack for making the best out of the worst situations. Where others see flooded farmland, he sees lakefront real estate. Where others see an infestation of bees, he sees free pollination and a upstart honey shop. Patrick’s articles will help you make the most out of the least, maximizing your returns while keeping a close eye on the wallet. When he’s not writing for Rocket Mortgage Patrick likes hiking, gardening, reading and making healthy foods taste like unhealthy foods.