It sounds like the right thing to do. You have the money, so you pay off the car. Maybe the mortgage. Maybe the student loan. You expect your credit score to jump. Instead, it drops.
Credit expert Micah Smith told Fox Business that this is one of the most common and most painful surprises she sees. And it catches people off guard every day.
Why Paying Off a Loan Can Hurt You
Here is what is happening behind the scenes. Car loans, mortgages, and student loans are called installment loans. They are different from credit cards. When you pay one off, the account is marked closed.
That matters more than most people realize. A closed account stops adding positive payment history to your score. It also reduces something called your credit mix, which counts for about 10% of a standard FICO score.
“They will actually have enough money to pay off student loans in full… thinking that they’re going to drive their credit scores up. And actually, it takes the credit scores backward,” Smith told Fox News Digital.
She added: “When you pay off an installment loan, it’s closed. So that positive history doesn’t factor into the credit score. And so you actually end up suppressing the score.”
Where to Focus Instead
If you want to move your credit score quickly, Smith says the place to look is your credit card balances, not your installment loans.
Credit card usage makes up 30% of your FICO score, and payment history accounts for 35%. That is nearly two-thirds of the whole number, right there.
The key is your utilization ratio: how much of your available credit you are actually using. Smith says keeping that number below 7% can generate real score gains in a short time.
“You can call your credit card company and say, ‘When is my closing date?’ And… you wanna get your balance down to 6% utilization or less. So if you have a $1,000 credit card, you want that balance to be $60,” she explained.
One more thing worth knowing: credit card issuers report your balance to the credit bureaus once a month, on your statement closing date, not on your payment due date. Getting your balance down before that closing date is what actually moves the needle.
Two Phone Calls Worth Making
Smith says a lot of people leave money on the table simply by not asking. She pointed to a June 2026 LendingTree survey showing that 84% of cardholders who asked for an interest rate reduction got one. But only 23% ever asked.
“You can help yourself by picking up the phone, making a phone call, and you can actually pay down your debt a lot faster just by simply asking for a reduction in the interest,” she said.
The second call? Ask for a credit limit increase. If your card company raises your limit, your utilization ratio drops automatically, without you spending or paying a cent more. Smith notes that even if the request triggers a credit inquiry, the impact is small: just two to five points.
Her broader advice: negotiate more than you think you can. “Half the money that you win or lose in life will be done at the negotiation table,” she said. “Rent can be negotiated, utilities can be negotiated, credit cards can be negotiated.”
Quick Wins Are Just the Start
Smith says she has seen scores move from the 400s into the 700s in a single month. She describes it as very realistic when the right moves are made in the right order.
But she is quick to add that a fast fix is only a starting point. The real goal is building habits that hold. “Short-term fixes, those are amazing… but they ultimately don’t address the underlying problem,” she said.
“People need to be reminded more than they’re taught,” Smith continued. “It’s not because you understand credit so well; it’s because you don’t, and you haven’t built the habits yet.”
So before you rush to write that payoff check, it is worth a phone call first. The answer might surprise you.
