Will paying off debt affect my credit score?

That large balance that you have months to pay off on your credit card or make a final deposit for your years of student loans is an unbeatable feeling. But more than just bringing your peace, it brings down your revolving and paid off debts, closer to financial freedom.

Revolving credit (credit cards) is an extension of credit with an allotted spending limit, but no term for the loan, while repayment credit (loans) offer lenders a fixed amount of money over a specified period. It does not matter what kind of debt you owe, you typically have to pay interest on the outstanding balances. The sooner you can pay off these debts, the less money will come out of your pocket.

That said, a common misconception is that your debt always pays off and increases your credit score instantly. It is true that getting rid of your current debt, like credit card balances, helps you lower your score by lowering your credit utilization rate. However, certain lines of credit may actually close temporarily thing your credit score. Paying off mortgage loans, which also include things like car loans and mortgages, can sometimes have the opposite effect.

“It can be frustrating to see a drop in your credit score when you make a smart financial decision,” said Amy Thomann, head of consumer credit training at TransUnion, one of the three major credit bureaus. But before you get discouraged, know why it happens and how important it is in the long run.

According to Experian, another credit bureau, there are a few reasons why your score may drop when you pay off a payday loan.

1. You have paid your only delivery account: Lenders like to see that you can manage a variety of different types of debt. If you consider that your mix of credit makes up 10% of your FICO credit score, paying off the only line of installment credit can cost you some points.
2. You have paid your lowest balance account: The outstanding balances on all your open credit lines, if you owe amounts, make up 30% of your credit line. If the installment loan you repaid had the lowest balance, which was the average amount owed and left your only remaining active accounts with high balances, then your credit score may drop.
3. Something else happened: Even if you paid off a loan for repayment and saw your credit rate drop immediately, it could just be a coincidence and something else caused your credit rate to drop. Keep in mind that a number of factors affect your score, such as applying for a loan as a new credit card or raising a high credit card balance in the meantime.

If you are experiencing a dip in your credit score when paying off a payday loan, know that it is probably small and only temporary.

Just because paying off a loan for a down payment could detract from your credit rate, do not keep it open just to maintain the high score.

You do not want to pay unnecessary interest over time, just to save a few points, and your 3-digit score may bounce back. The average time for recovery of credit scores after closing an account (for those with bad to honest credit) is according to Bankrate three months. Making a series of monthly payments on time is the fastest way to improve your score. (Payment history is the most important factor.)

“Remember: your credit line is just one piece of your overall financial health,” says Thomann, emphasizing the importance of reducing interest and total debt. “The fact that you make the effort to actively take control of your credit health and take control makes you more likely to reach your financial goals in time.”

If you want to keep track of how paying off your debt affects your credit score, sign up for a credit monitoring service that can help you. CNBC Select has our favorite rankings and those at the top of the list include Capital One’s CreditWise® for best general paid service and IdentityForce® for best general paid service.