Why your creditworthiness can go down after repaying your personal loan

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Paying back a loan can feel like a load off your shoulders, especially if you are uncomfortable bearing debt. But there are several other benefits to focusing on debt settlement, such as improving your debt-to-income ratio and building your credit score.

Typically, paying off revolving debts like credit card balances can help you improve your credit score, provided that no other payments are late and you don’t sign up for multiple new lines of credit at the same time.

But when it comes to installment debt like personal loans, you may not notice any changes in your creditworthiness after the balance is paid – in some cases, you may even find that this causes your score to drop slightly. This can feel both confusing and daunting, but there are a few reasons why you may not see your credit score increase after paying off a personal loan.

Just remember that such a drop in your credit score is only temporary and you should never avoid paying off debts on it; Your creditworthiness can always be restored over time by continuing to maintain positive credit management habits like maintaining a low credit load and missing out on a payment.

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The average age of your accounts has now gone down

the Your credit history length is 15% of your FICO score. It is calculated by looking at the ages of each of your open credit accounts and taking the average between them. Typically, the longer your credit history, the higher your credit score.

If your personal loan is one of your oldest recurring accounts, it will be closed after repayment and will no longer be taken into account when determining your average account age. Because of this, your credit history seems to be going down. However, over time, your average account age and credit history may increase as you continue to be a credit consumer with other forms of open credit.

You now have a less diverse credit mix

Another important factor in determining your creditworthiness is Credit mix. The credit mix is ​​only 10% of your FICO score, but it’s still a sizeable part of determining your creditworthiness. Credit bureaus want to make sure that you have a track record of effectively managing various types of credit, including credit cards, auto loans, mortgages, and all other forms of credit.

A credit card is a widely used form of credit, but an open personal credit account can also add to a more diverse credit mix, as credit cards are a form of revolving credit and personal loans are a form of installment credit.

With revolving credit, you are given a limit and can borrow as much money as needed repeatedly up to that limit as long as you pay back what you borrowed. With the installment loan, however, you have a fixed period of time to repay the total amount you have borrowed, and the payment is usually made in fixed monthly increments. Different lenders have different repayment periods (also known as repayment terms) – for example, Upstart personal loans have repayment terms of 36 months, while OneMain Financial Personal Loans have terms of just 24 months.

So, if your personal loan was the only non-credit card account you had and you paid it off and closed it, you will end up with a much less diverse mix of credit, which could be a cause of a drop in your credit score.

Upstart personal loans

  • Annual percentage (APR)

  • Loan purpose

    Debt Consolidation, Credit Card Refinancing, Wedding, Relocation, or Medicine

  • Loan amounts

  • conditions

  • Credit needed

    FICO or Vantage score of 600 (but accepts applicants whose credit is so poor that they have no credit)

  • Origination fee

    0% to 8% of the target amount

  • Early withdrawal penalty

  • Late fee

    The higher of 5% of the monthly overdue amount or $ 15

OneMain Personal Financial Loans

  • Annual percentage (APR)

  • Loan purpose

    Debt Consolidation, Large Spending, Emergency Costs

  • Loan amounts

  • conditions

  • Credit needed

  • Origination fee

    Flat fee from $ 25 to $ onem00 or a percentage between 1% and 10% (depending on your state)

  • Early withdrawal penalty

  • Late fee

    Up to $ 30 per late payment, or up to 15% (depending on your state)

You recently applied for another line of credit

Of course, you can also wonder if repaying your personal loan and a drop in your credit score coincided with you Apply for a new credit card, take out a car loan, or even increase your spending on an existing credit card. These are all measures that can temporarily lower your credit score, since applying for a new line of credit puts a tough test on your credit report and increasing your credit card spending means increasing your credit utilization.

Loan Utilization is a measure of how much credit you are using in relation to how much credit you have available. In general, a high usage rate indicates that you are using too much credit. Experts therefore usually recommend keeping this rate below 30% in order to maintain a healthy reputation.

Bottom line

Paying back a personal loan can have an impact on your credit score, but ultimately the extent of the impact will depend on your credit profile, including the length of your credit accounts, the variety of your credit mix, and the other forms of credit you have applied for.

While it can be daunting to see a slight decline in your credit score after repaying a personal loan, keep in mind that the decline will only be temporary – over time, by continuing to make timely payments on your other accounts and yours Paying attention to creditworthiness can help you increase your creditworthiness.

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Note to editors: The opinions, analyzes, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.

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