So, why did my credit score to drop when I paid my car off? The answer is simple and a lot of people don’t even know it. It all boils down to how the credit bureaus view your credit.
When you apply for credit, the first thing that the bureaus pull is your credit score. This credit score determines whether or not you are credit worthy to obtain a loan. Every time you apply for credit and are approved, this information is reported to the credit agencies. They keep track of your credit history and make adjustments to it. If your credit score drops while you are paying off your car, they don’t see it as a serious problem.
The next thing the bureaus pull is your report on file for your credit. This includes your outstanding debts. While this is not supposed to be a reflection of your credit worthiness, the bureaus have been known to make this mistake. The report is pulled so frequently that if you don’t clean it out, it can negatively affect your credit report and your ability to get future credit.
The last thing the bureaus pull when you apply for credit is your report on open lines of credit. Here is where things can get messed up. An open line of credit is a line of credit that has never been used before and therefore does not have a good impression of you.
If you are using a credit card for your payments, then your credit score will probably reflect a positive. This means that you have a history of making payments on time and everything is fine. But what if you are not? What if your account is in collections and you still haven’t made a payment in several months? When you pay a credit card in collections, your credit score immediately drops.
The only way to overcome this problem is to begin to clean up your credit score. It starts with clearing up any negative marks that show up on your report. You need to dispute all accounts with the three major credit agencies (Experian, Equifax, and TransUnion). To dispute an account, you will need to write to each agency and ask them to provide proof that the information is correct.
Be careful, however. The bureaus have been known to delete inaccurate or false information from credit reports. So be sure to check and make sure everything on your credit report is correct. Sometimes you can get lucky and have inaccurate or false information removed just before the payments come due. In this situation you would have had to pay the company for the error before they were paid, but unfortunately you would have to wait until your next payment due date.
Your credit score will begin to rise again once all of the collection accounts are removed. Then, within a few months of cleaning up your credit, you will begin to see a new credit score being offered to you by your lenders. This time, the interest rate will be less, as it will be a re-negotiation of the debt. You will also be offered a lower monthly payment because you are considered a better risk. Hopefully, this led you to the question “Why did my credit score to drop when I paid my car?”
A re-negotiation of the terms of your debt will probably lead to lower payments. But, as with any financial obligation, the payments themselves will more than likely have an impact on your credit score. It might take a couple years for the effects of your past mistakes to fully set in.
Paying your bills on time has another benefit to the equation. Once your credit score begins to go up, lenders will see that you are less of a financial risk. They will offer you better terms on your loans. The terms you receive are based on your payment history. Therefore, if you have consistently paid your bills on time, lenders will deem you less of a financial risk.
So, what can you do to reverse the effects of a credit-to-debt spiral? If you know you have a problem, try to do whatever it takes to correct that problem. For example, if you know you have too much credit card debt, try to reduce that debt as much as possible. Or, if you think you are getting harassed by telephone calls, block those calls or report the number to the phone company. As you can see, there is always a way to improve your credit score. The question is, how do you learn the techniques and strategies that work the best?