Does paying off your car early raise your credit score?

[razorbackbelle0]

I never had a late payment, and I paid off my car almost 4 years early. Will this raise my credit score?

TIA!

[missisa07]

First of all, congratulations!

Second, here's what I found from WikiAnswers:


Does paying off a car loan within a couple of months raise your credit score?

No. Paying off an installment loan early causes no increase in your score. Installment loans are opened for a set amount, with terms of repayment at a set amount. This is what (ideally) both the lender and credit scoring software are looking to see: That you understand this concept and will pay the loan back over time, on-time. That translates to no appreciable benefit for paying early.

However, it is (sometimes) possible to reap monetary benefits. Most installment loans are fixed rate loans. You borrow $X at X% and will pay back the full amount regardless of when you pay. But, if you happen to obtain a compounding interest installment loan (similar to a mortgage loan), there may be significant savings in paying off early. So, while this wouldn't help your credit score in any way, it might save you some $, if you have that specific type of loan. You should be able to find out by reading your loan documents or calling your lender. You may also have a pre-payment penalty. That's another good reason to read your loan docs thoroughly.

[razorbackbelle0]

I know I don't have a prepayment penalty, and my loan is the second kind, that saves me money paying off early....

[lorihmatthews]

Hmmm ... but wouldn't paying off the car reduce your total debt ratio, thus raising your credit score?

[Zophie]

While it may not increase your credit score it might improve your ability to get another loan in the future for another car or a house. Credit score isn't the only thing considered in those instances.

[Needanotherbag]

It doesnt automatically, similar to paying off a mortgage...it isnt revolving credit, its a loan, which is looked at differently. I just found this out recently.

[dr. twiggers]

Originally Posted by lorihmatthews

Hmmm ... but wouldn't paying off the car reduce your total debt ratio, thus raising your credit score?

Not necessarily because a car loan isn't revolving! The credit utilization is what is looked at with FICO scores. Your debt to income DOES NOT count in FICO scores. It will help with another car loan or mortgage where they look at debt to income.

[cola262]

Paying off a car will NOT raise your credit score. Also, paying off a mortgage early may lower your credit score.

Lenders like to see a long track record of on-time payments on these loans.

[razorbackbelle0]

&%$#! That's just stupid to me. I paid on it for a little over a year, never late; I'd think doing that, then paying it off early would look good to lenders, you know, like I can handle debt and will pay it off. :(

[dr. twiggers]

^^^^^it'll be good if you're planning on buying a house in the future.

BUT just think of all the money you saved! That should be reward enough :-)

[razorbackbelle0]

I did save $1700 in interest...

[candace117]

The car loan situation would be more directly beneficial to buying a house, not getting credit cards or other things that involve the revolving credit. It's stupid, but now that lenders are cracking down on everything, at least you have one thing going for you! haha...they like it if you have high limit cards with a low balance, too.

[cola262]

^^ Unless you're trying to get your credit score super high to get a low interest for a mortgage, saving money on the interest rate is worthwhile when paying off a loan early. That's a nice amount saved. =)

[Odette]

That's a lot of interest saved! I would rather have that than raising my score a few measly points.

[Litigatrix]

well think about it from a lender's perspective -- they like making interest off of you, so to them paying off a revolving loan early is kindof a negative because that's $$ you took out of the lender's pocket by paying early.