Paying Off Loans Can Hurt Your Credit Score

Many people try to improve their credit by paying off loans. They think getting rid of all debt helps their score. But a credit expert, Micah Smith, says this can actually hurt your score. It is a common mistake people make.

Smith explains that closing out old credit accounts can shorten your credit history. Lenders like to see a long history of managing credit well. When you pay off a loan and close the account, that history might disappear from your report. This makes your credit profile look less established.

Your credit score also looks at different types of credit. This includes installment loans, like car loans or mortgages, and revolving credit, like credit cards. Having a mix shows you can handle various debts. Paying off and closing an installment loan removes that type of credit from your mix. This can make your score drop.

Instead of closing accounts, keep them open if possible, especially old ones. Even a small balance on a credit card, paid on time, builds a good history. Focus on making timely payments and keeping your credit utilization low. This helps your score more in the long run.

Source: Fox Business