Does Paying Off A Car Loan Improve My Credit Score?

One of my clients asked me if paying off a car loan would improve her credit score. In answering her question, I thought to myself that I would share my answer with you, just in case you had a similar thought at one time or another. Anytime you can pay off any of your debt, it is a good thing. That’s one less payment you have to make every month and paying off your car means you now own your car.

The greatest benefit of paying off your car loan doesn’t come from the fact that you paid it off. The greatest asset for you is from your payment history and the successful management of paying an installment loan on time. The fact is your payment history affects your credit score more than paying the loan off.

It is usually a good idea to carry one installment loan on your history to help your credit score. The reason for this is because 10 percent of your FICO score is arrived from the different types of loans that you are carrying. If you carry different loans such as, credit cards, revolving credit, installment loans, etc., this shows that you can manage different types of loans and you are more responsible and experienced to handle a loan.

When you pay an installment loan off, like your car, the formula that the credit card bureaus use essentially pays no attention to when you pay your car loan off, when it comes to the variety of your credit. It could lower your FICO score unless you were to have another installment loan on your report.

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