What happens to my credit score when I pay off a personal loan?

Why scores dip at payoff: Credit mix: FICO rewards having both revolving credit (credit cards) and installment credit (loans). When you pay off and close your only installment loan, you lose that mix point. If you have other installment loans (auto, student loan), the dip is smaller. Average account age: closing an account removes it from the average age calculation over time (though closed accounts stay on your report for up to 10 years, they stop contributing to average age when closed). Score impact: 2-10 points is typical, with larger impacts for borrowers with thin credit files or limited remaining accounts.

Why it does not matter much: The paid-off loan's positive payment history remains on your credit report for 10 years from closure. This long-standing record of on-time payments continues to benefit your score. The dip is temporary and usually recovers within 1-3 months as your remaining accounts accumulate additional on-time history.

Strategic timing: If you plan to apply for a major loan (mortgage, auto) within 1-3 months, be aware that a recent payoff can cause a temporary score dip. This is usually minor and most lenders understand the cause. It is almost never worth keeping a loan open (and paying interest) solely to avoid this temporary dip.

The financial reality: paying off a loan saves interest that far outweighs any credit score cost. At 12% APR on a $10,000 loan, paying off 12 months early saves approximately $600-$700 in interest. No minor score fluctuation justifies foregoing those savings.