Why Does Your Credit Score Take a Hit When You Pay Off Your Student Loans?

By John Davidson | Published on October 21, 2025

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Imagine you just made your last student loan payment. Relief washes over you as you hit send and officially closed your account. A week later, you check your FICO credit score and get an unpleasant shock—it’s gone down by 40 points. You just paid off a loan, so what happened?

Everyone says that paying down my debt as quickly as possible is the most responsible thing to do, but not many people discuss that it’s normal to see a temporary dip in your score. Let’s take a look at how this could happen and why it applies to all kinds of credit, not just student loans.

Shouldn’t my score go up when I pay off my student loan debt?

Not necessarily. Paying off any debt, such as a credit card, personal loan, or a car loan, and closing credit accounts could temporarily lower your credit score.

Why Do Final Payments on Student Loans Cause A Credit Score Drop?

When you pay off a loan and then close the related account, it can impact your FICO credit score in a couple of ways. (A quick refresher on your FICO score: The formula major credit bureaus use to calculate this number has multiple factors, including credit utilization, the length of credit history, payment history, and credit mix.)

First, when you close a revolving account (like a credit card) it can affect your credit utilization ratio or the amount of revolving debt you have relative to the available credit you have. If you close an unused $0 balance credit card, your utilization ratio will increase. And, that could negatively impact your credit score in all three major credit bureaus such as Experian, Equifax, and TransUnion.

In other words, credit bureaus want to see that you have high purchasing power and low credit usage, ideally below 20% of the total credit limit on your cards combined.

Next, the closure of an account could zap the repayment history associated with that account. A long history of on-time monthly payments helps build your credit—but if you close that account, there goes its history with it. That could also negatively impact your score.

Third, when you close your student loan accounts, which are considered installment loans, and have only revolving credit remaining (like your credit card) or no other credit at all remaining—your credit mix will change. This could also negatively affect your score. You could have federal student loans or private student loans¹, repaying your full loan balance will close your account with the servicer and impact your credit.

The more credit history you have, the less your credit score will be impacted by singular events like closing an account.

Learn more: How to Read Your Credit Report

How to Quickly Correct Your Credit Score

If your good credit score did take a hit, and you’re looking to build it back up in a short period of time, you might consider using a credit card or other types of credit in a responsible way as a way to boost your good credit. The best way to accomplish this is to always make on-time payments each month, avoid late payments, and keep the account open even if you’re not using it every month. If you have credit card debt, try to keep your credit card balances to less than 20% of your total borrowing power.

Avoid applying for new credit if you can. A new credit inquiry could lower your credit score even more.

Showing that you can sensibly manage both installment debt (like a student loan or auto loan) and revolving (like a credit card) is a factor in your overall score. This can help with improving your credit mix and your credit profile. If your credit file is relatively thin (i.e., if there are not a lot of items in it either because you are new to credit or you don’t utilize it as part of your financial strategy) then your credit mix is even more important.

Lastly, one more thing to be prepared for when closing an account is the potential for fees. In the world of lending companies, whenever a borrower pays off their loan before the repayment plan term is due, it’s considered a “prepayment.”

One reason many loan servicers don’t like prepayment is that it makes it harder to track and manage loans. In fact, many traditional lenders discourage people from doing this by imposing an additional fee if they pay off their loan before the due date. (Note: Earnest* never charges fees for extra payments or paying off a loan.)

What are the best things you can do to ensure your credit score improves over time so lenders can offer you lower interest rates? Be attentive to your personal finances and bank account, ask questions, stay in good standing with your lenders, and make sure you truly understand the terms of any new loan or line of credit. Becoming debt-free is the ultimate goal for all people, managing your credit responsibly can help you borrow money more cheaply when you need it.

JD

About the Author

John Davidson

After a stint pretending to be a banker, John Davidson joined Earnest in 2014 to help democratize access to capital. A few hundred thousand applications later, he is the Head of Credit Operations and still attempting to make the world a better place one loan at a time. If you crave more stories to cure insomnia, you can find John rambling about credit underwriting at many of Seattle's fine roasteries.

Disclaimer

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

*Earnest private student loans are funded by FinWise Bank, Member FDIC, or One American Bank, member FDIC
1 Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities. 2) Next, fill out a FAFSA(R) form to apply for federal student loans. Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if your struggling with your payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.gov/.