Does paying off your car loan improve your credit score?

Answer 1

There is no direct benefit to your credit score to pay off an installment loan early, but indirectly it could help. Installment loans are established by a contract which details the amount of money borrowed and the terms, which is a monthly payment promise over a specific period of time. For auto loans, this is typically 24-60 mos. Lenders are particularly interested to see if borrowers understand this concept; that they are to pay their payment, on time, over the length of the contract. Therefore, you receive no "credit" for paying early.

However there are indirect benefits. If your debt load goes down, you are less likely to have credit applications denied, and a denial of credit is a bad mark on our report.

There are other reasons to pay off an auto loan. Most likely you are paying more interest on the car loan (5, 6 percent or more) than the interest you get if you leave money in a savings or checking account (less than 1 percent) , so if you have money laying around, using it to pay off your auto loan is like investing that money at the same interest rate as your car loan. Who wouldn't want to make five percent interest on their money? This rule applies generally to all loans - if you have money you don't need for an emergency, use it to pay off your high interest loans rather than let it sit around in an account that pays little or no interest.

Comments:

• I recently bought a new car and about 6 months after applied for a credit increase on one of my cards. They infact denied my request because I still had a reasonable amount to pay off on my car. And this denial can lower your credit score. So if I had paid off the car then they would of accepted my credit increase and my score would of went up. The score itself might not go up because of the type of loan that it is but mortgage companies and other credit card holders will see that you have the funds available to pay off your bills/loans on time.
• It is especially unwise to owe money on a depreciating asset, and cars depreciate rapidly. You will soon end up owing more on the car than it is worth. Instead, pay cash for a car you can afford today. If you don't have debt payments, you can invest your money and some day buy a better car, because you will have money.