Paying off a car loan early might feel like a huge financial win, but it can be surprising—and frustrating—to see your credit score dip afterward. Here’s why this happens and what it means for your credit health.
Reduced Credit Mix
Credit scoring models, like FICO, value a mix of different types of credit accounts, such as installment loans (like car loans) and revolving credit (like credit cards). When you pay off your car loan, you close an installment account. This reduces your credit mix, which can slightly lower your score.
Shorter Credit History
The length of your credit history matters. Even though the car loan will stay on your credit report for up to 10 years, closing it early means the account is no longer active, which could lower the average age of your accounts—a factor that influences your score.
Fewer Accounts Reporting Activity
Active accounts help demonstrate responsible credit use. When you pay off a loan, there’s one less account reporting monthly activity, which can temporarily impact your score.
Lower Utilization Might Not Apply
Unlike credit card balances, installment loans don’t significantly impact your credit utilization ratio. So, paying off a car loan won’t boost this part of your score, and the other factors above may outweigh any benefits.
Don’t stress too much about a slight drop. Credit scores fluctuate, and this dip is likely temporary. Continue managing your remaining accounts responsibly, keep credit card balances low, and avoid applying for new credit unnecessarily. Over time, your credit score will stabilize and likely improve as a result of your good financial habits.
Remember, paying off debt—especially ahead of schedule—is still a great accomplishment! It might cause a minor hiccup in your credit score, but it’s a positive step toward financial freedom.