Have you ever paid off debt only to find that it caused your credit score to drop?

Paying off debt is absolutely a good thing. But why would it cause a credit score to drop? It can be very frustrating, if you monitor your score from month-to-month, to pay off a loan only to see the score drop by 22 points.

What’s more, while the folks at FICO give us a lot of information about how they calculate credit scores, the actual formula remains a trade secret. We take a closer look at the reasons your score changes.

8 Reasons Your FICO Score Changes Monthly

1. Aging of Negative Items in Your Credit Report

Events such as bankruptcy, foreclosure, or late payments are examples of negative items that affect your credit score. These events remain on a credit file for several years. A late payment, for example, remains on file for about seven years. As these events age, however, the effect they have on your credit score diminishes. As a result, your score can go up.

Related: How a Debt Snowball Can Reduce Debt

2. Changes in Revolving Credit Balances

Changes in revolving credit balances can cause credit scores to fluctuate. Credit card balances, for example, can change from month to month as you use your card. This payment history has a large impact on your credit score.

A credit utilization ratio is calculated by dividing the amount of your debt on a credit card by your credit limit. For example, let’s assume you have one credit card with a $5,000 balance and a $10,000 limit. So $5,000 divided by $10,000 is 0.5, meaning you would have a utilization of 50%.

FICO looks at the ratio both on an account-by-account basis and on an overall basis. The lower the utilization, the better. According to Tom Quinn of FICO, it’s best to aim for utilization of no more than 20- to 30%.

One thing to keep in mind is that these revolving balances can change from month to month. Hence, your ratio also changes. If it goes up over a threshold that FICO finds significant, your score could drop. If it goes down and crosses a threshold FICO finds important, your score could increase.

3. Age of Accounts in Your Credit History

As your credit history and accounts age, your score can improve. FICO looks not only at your oldest account but also at the average age of your accounts. Scores can increase when accounts cross an age threshold that FICO finds significant.

Related:11 Simple Ways to Improve Your Credit Score Today

4. Changes in the FICO Formula

FICO changes its formula periodically. FICO is continually trying to improve its formula to make it a more accurate indicator of credit risk. The same is true for non-FICO credit scoring formulas. The result is that multiple versions of the FICO formula are in use at any one time. When a new version is applied to your file, it can change your score.

Related: A Rare Glimpse Inside the FICO Credit Score Formula

5. Applying for New Credit

Applying for credit could lower your credit score. Generally, however, inquiries are not a significant factor in the FICO formula.

Related: The Bottom Line Credit Inquiries Have on You

6. Scorecard Hopping

Another explanation for changes in a credit score is getting a new scorecard. Called scorecard hopping, this occurs when FICO places a consumer in a new scorecard. FICO doesn’t simply lump every consumer into the same pot and evaluate us all equally.

FICO provides very little information about its scorecards. One factor, however, is for those who have a bankruptcy on their record. Scorecards enable FICO to evaluate the risk of similarly situated consumers.

Scorecard hopping occurs when FICO moves a consumer from one scorecard to another. For example, if bankruptcy is removed from a consumer’s credit file, they will be moved out of the bankruptcy scorecard into another scorecard. What’s interesting here is even though you might get moved into a better scorecard, your credit score can go down.

Why? Because you are now being compared to a different group of consumers. You may have done well when compared to others who have filed for bankruptcy. After the scorecard hop, however, you are now with a very different group of consumers. Long term the switch should help, but in the short term, it can lower your score.

7. Late Payments

This is the most critical causative factor for credit score fluctuation. Even one 30-day late payment can significantly affect your credit score. A late payment stays on your file for up to seven years. Even if you’re doing everything else right, a single late payment can have a negative impact on your credit score.

Related: How Late Payments Really Affect Your Credit Score

8. Why Did My FICO Score Drop After Paying Off Debt?

This factor seems unintuitive at first, but it’s true, your credit score can drop after you completely pay off certain debts.

A credit score is calculated based on a complicated formula. Unfortunately, that score is occasionally negatively affected in unexpected ways, and paying off loans can sometimes cause this formula to change for the negative.

For example, if you paid off your only installment loan, it can negatively affect your score. This is because creditors prefer someone who can handle a varied range of debt-also known as having a favorable credit mix.

Paying off your loan may also have negatively impacted your credit ratio. For example, if you completely paid off a credit card with a favorable utilization ratio, you may only be left with credit cards with a less favorable utilization ratio. The effect is to cause this ratio to increase overall.

You may also have paid off an older source of debt, which would unfavorably affect the average age of your accounts. Creditors prefer to see you can handle debts for a long time. Paying off that account may negatively impact your score as a result.

3 Tips for Monitoring Your Credit Score

1. Make Sure to Check Your Credit Report

You can get your credit report for free at annualcreditreport.com. You’ll get your report from each of the three major credit bureaus for free once a year. Check for errors. Misinformation can lower your score unexpectedly. It happens all the time.

2. Use Free Services to Understand What’s Helping or Hurting Your Score

The second thing you can do is use services that provide what are called educational scores. These scores are not calculated using the FICO formula, but by using a variety of other credit scoring formulas. These services do an excellent job of educating you about your credit score. You can see what’s hurting your score and what’s helping your credit score, so you can figure out what you need to improve.

Three services I can recommend are Credit Karma, Experian, and Quizzle. They’re all free. You don’t need a credit card. I’ve used them all and they’re very easy to use.

3. Monitor Your FICO Score

If you are buying or refinancing a home, you may want to see your FICO Score. Simply go to myFICO. There are some costs involved but it’s not particularly expensive. They have a credit monitoring service you can continue to use every month.

3 Tips for Building a Better Credit Score

Of course, it’s about more than just monitoring your credit score. You’ll also want to take active efforts to raise your score over time. Before we wrap up, we’ll examine the most important things you can do to grow your credit score over time.

1. Pay Your Debts on Time

On-time payments are the single biggest factor affecting your credit score. Paying your bills on time does cause most people’s credit scores to fluctuate. A single missed payment can stay on your credit report for up to seven years.

We recommend you schedule a consistent time for meeting these obligations. Set aside a day each month that works for you, and focus on meeting all of your debt obligations. This ensures that bill/debt paying becomes a habit, decreasing the likelihood you ever miss a payment. It also makes the process easier, because you can get everything done at once.

Related: How to Get Out of Debt

2. Keep Your Credit Utilization Ratio Below 30%

This is calculated as the percent of the credit limit that you use. Creditors want to see a low utilization ratio – preferably below 30% of your available credit. Know the limits on every credit card, and be conscious of the amount you spend (checking regularly). The higher above 30% you go, the more your credit score will trend downward. It’s important to hold yourself to these spending limits over time.

3. Only Use Credit You Can Afford

This may seem like an obvious factor, but it’s no less important. You need to reframe your understanding of credit as a payment you will need to make shortly. In other words, don’t use credit if you aren’t confident in your ability to pay it off. The more sources of credit you take on, the less likely you are to meet all these obligations. We wouldn’t recommend any person take on more than three credit cards, and be sure to rotate usage so the utilization ratio on each card doesn’t suffer. Of course (and most importantly,) be sure to pay off your credit card each month.

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  • Rob Berger

    Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.