Credit Score Basics > Will paying off a loan improve your credit score?

Will paying off a loan improve your credit score?

Wollit Team2 minute read · Updated 19th September 2024

Paying off a loan doesn’t always improve your credit score. In fact, it can sometimes cause it to drop a little bit. At the same time, lenders like seeing that you can pay off loans in full and on time. They also like seeing less debt.

Confused? Here is how paying off a loan works and how it can affect your credit.

How does paying off a loan affect my credit score?

One one side, paying off a loan has many benefits:

Paying off loans reduces how much debt you have compared to your income. Lenders like to see that you can afford new financial obligations.
If the loan was revolving credit (like a credit card), paying it off lowers how much of your available credit you’re using, which helps your score.
And of course, regularly paying off loans builds a strong payment history that helps with future loans.

However, while paying off a loan shows good money management, it might not boost your score right away. For example, if you pay off an instalment loan (like a personal loan), your score might drop a little at first.

This can happen if it was your only instalment loan – having different types of accounts is good for your score. Not to mention you now don’t have anything else continuing your credit history.

You’re basically left without anything building your credit history. And it’s the recent credit history that lenders will always care most about.

Should I pay off all my debts at once?

While paying off debts is good, doing it all at once might not be the best idea if it leaves you with fewer active accounts. It’s often smarter to pay down debts gradually while keeping some accounts open.

However, you shouldn’t stress too much about this. Paying off loans is almost always a good step toward improving your financial health.

While, sure, there might be some immediate ups and downs in your score, the long-term benefits are quite good.

The only thing you need to worry about is not leaving your credit file with nothing to continue building your credit history.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app that reports your monthly subscription as loan repayment, helping you build a history of timely repayments without the risk of getting hit with high-interest charges or going over your card limit. It can even report your monthly rent payment to Experian, adding another line in your credit report that shows lenders you're responsible and pay your bills on time. This is what lenders really care about, after all.