Credit report showing credit score of 790 and excellent rating.

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Recently, I paid off the mortgage loan my husband and I took out on one of our houses in 2014. I assumed paying this debt in full would be great for my credit, since it shows I've been very responsible repaying my loan over time, even paying it off early. 

I was excited to check my credit score once my mortgage company notified the credit bureaus of my final payment. Then, when the payment cleared and my account showed up on my credit record as "closed, paid in full," I got a surprise. 

Here's what happened.

Repaying my mortgage caused my credit score to go down

When my mortgage loan was marked as paid on my credit report, my credit score fell by 11 points, even though nothing else had changed. While this isn't a huge drop, it was a decline nonetheless, and it wasn't what I had anticipated from showing I could be responsible by paying off my loan. 

Unfortunately, it turns out this wasn't an error. There are good reasons why this happened. 

First, when I paid off my mortgage, that eliminated one type of credit from my credit history. Having different types of credit is one of the key factors that determine your credit score, along with payment history, age of credit history, amount of credit used, and number of inquiries on your report. 

Lenders want to see you're consistently paying different kinds of loans on time, over time. That's why it helps to have several kinds of debt, such as car loans, credit cards, personal loans, and home loans. Now I've eliminated a loan with a fixed monthly payment, so I have less of a chance to prove I'm able to submit my bill payments in a timely fashion every month. Since I don't borrow money outside of mortgages and credit cards (which I pay in full each month), losing the mortgage loan made a big impact. 

The second issue relates to the amount owed in proportion to the amount borrowed. Your credit score is higher if the loan balances you owe are small compared to the amounts you borrowed. And my mortgage was helping with that. 

As an example (which isn't the actual math on my mortgage loan), if you took out a loan for $10,000 and have paid off all but $2,000, your remaining balance is only a small portion of the total you borrowed. Since I had paid off most of this mortgage, my credit history showed I had a low balance relative to the total amount of credit. Once that mortgage was closed, however, I was left with only a mortgage for a different property on my credit history. Because I've paid a much smaller percentage of that loan, that hurt my score too.

All of this means that if you're planning to pay off your mortgage -- or other debt -- you can't necessarily count on improving your credit. In fact, the opposite may happen. That's not a reason to avoid becoming debt-free if that's one of your goals. But it is something to plan and prepare for if you're anticipating paying off a lot of your debt and borrowing again in the future.