Speaking of Credit

How to restore your good credit score to great


Examine your recent loan-related activity to find what caused the drop

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Dear Speaking of Credit,

Hi. I had a credit score of 789 back in July, but now it’s down to 746. I just ran my credit report from Experian, and the only thing that’s not very good is the length of my credit history. I did pay off my student loan debt a few months ago (this is one of the three accounts showing “closed”), which correlates to when my score started going down. The other two accounts are a MasterCard that I closed right away and another duplicate of my student loan for some reason. What can I do to get my credit score back up? Thanks in advance for your help. – Katherine


Dear Katherine,
If it makes you feel any better, despite the 43-point drop, a 749 score is actually quite good. For instance, a 740+ score will get you approved for most credit at good rates. Still, I get that 749 is not 789, and don’t blame you for being concerned.

Should you insist on worrying about your score anyway, worry about getting it to a 760. This tends to be the score that will get you just about any kind of credit, including a mortgage, at the best rates. My first suggestion then is to consider 760 your new goal.

So, why did your score drop substantially after paying off your student loan?  And what can – or can’t, as the case may be – you do about it? From what you’ve shared, at least three major factors are likely to have had some influence on this rather unpredictable score change:

  1. Paying off (closing) your student loan. Most credit scores give points for having an open installment loan – student, auto or mortgage – along with at least one open credit card. Consequently, and contrary to common sense, you can miss out on points when the last or only open loan is paid off (closed). Fortunately, such factors make up only a small proportion of the score – less than 10 percent.
  2. Removing or updating the duplicate student loan credit report tradeline to “closed.” Considering that scores look more favorably on a credit report containing at least one open loan and card, paying off the student loan debt and leaving a duplicate account still reporting it as an “open” may have at first helped and then hurt your score once it was either removed or corrected to show paid (closed). To the score, you went from one open loan to no open loans.
  3. Closing the MasterCard. We know from what you’ve shared with us that your card debt is well under control. Still, closing this card could have raised your credit utilization percentage at least slightly – costing you a few points – with the removal of that card’s credit limit from the utilization calculations.

Steps to restoring credit
With high scores, such as both your “before” and “after” scores, there typically aren’t many major changes left to make. Still, there are a couple of steps you can take to help raise at least some of those 11 points needed to reach 760:

No new accounts for six months.
This is more of a “don’t” than a “do.” Over the next six months, just say no to any new credit accounts. By allowing your existing accounts to age while keeping out any accounts with recent open dates, you’ll be increasing your length of credit history numbers that make up about 15 percent of your credit score.

Pay charges before they’re due.
During those six months, if you’re not already doing so, there is one proactive strategy that could add some points to your score. Paying your credit card charges on all but one or two of your active cards before the next closing date will cause the monthly statement amounts on your credit report to show $0 balances for every card paid in this way. Reducing already-low balances even further can help reduce your credit utilization and raise your score.

Why not pay all card balances before they’re due? As a note of caution, and clearly a downside of paying all card balances in this way, $0 balances on every one of your active cards can signal to the scoring formula that you’re not actively using revolving credit. Having all of your cards reporting $0 balances can leave you with fewer points than if, instead, you leave just a small balance – 1-5 percent of the limit – on one or two cards.

Due date or closing date? Another note of caution, when paying card bills early, be sure not to confuse due dates with closing dates. If you had a balance on your last closing statement you will have some payment amount due by the following due date. If not paid by this date, a late fee will be added to your balance. However, any amount in addition to the amount due can be paid by the closing date that follows shortly thereafter without penalty.

How much more score to expect? Not knowing any of your balances, credit limits, credit utilization or how many cards you have – open or otherwise – keeps us from having any idea just how many points this new way of paying your cards will net. Yet it’s safe to say that the higher your utilization currently, the more points you have to gain by paying before charges are due.

Having said all that, congratulations on paying off your student loan debt!

See related: How to build credit with a student loan, FICO’s five factors: The components of a credit score

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