Downgrading car to improve credit score?

[Anonymous]

My goal is to improve my credit score so I can be approved for a mortgage, later this year, but I'm not really sure how my vehicle should play into my overall strategy.

Would I be better off selling my car and removing the auto loan, then buying something in cash? Trade-in and taking a loan on something cheaper, improving DTI? Or, simply keep my current car because of the value this auto loan brings to my credit score? I can still afford it, I just want to be in the best position possible.

I've already paid off my credit card. All of my student loans are current and I have no other debt.

My auto loan was for $16k and I now owe $12.9k on it. If I were to trade it in, I would likely be looking at a $10k car and would have about $2,700 trade-in value to put towards the new purchase.

I'm not sure which route would be best for my credit score. I read that closing auto loans out early, can actually have a negative impact? Also, this might be a stupid question, but when trading in do they count your current auto loan debt against you? I noticed not all credit apps ask if you're trading in.

[Kree]

There are two thing at play here. Your credit score, and your DTI.

For your credit score, keep your current car.

1. New loan = new inquiries.  New inquiries= lowered score

2. New loan = new Age of Youngest Account.   new AoYA=lowered score

3. paying off loan = no installment account.  No installment account= lowered score (assuming you do not have another installment account. If you do have another installment account ignore this one.)

For your DTI, downsize your car.

Now which is better for your mortgage? higher score, or lower dti?   Depends upon your score, and your DTI. We could only make a guess, but if you provide these numbers we can give you an educated guess for which is more important for you at this time.  Also talk to your Loan Officer, they can let you know what they are looking for in a profile better than we can.

[trusty]

I can only echo the previous poster's knowledgeable and succinct post.

But, I will say this. Before applying for a mortgage, it's not recommended to do anything drastic. Acquiring any new loans within 6 months to a year of applying for a mortgage is not an advisable strategy. It not only can hurt your score, but underwriters are not very keen on extremely new data points. It can make a borrower look desperate, and therefore potentially unreliable.

That said, if DTI is within a single car payment of being able to afford the mortgage... one may want to reconsider their whole timing.

However, if one's car payment is something crazy like $850, it makes sense to get out from under that, any way that they can... credit score be damned. Credit score will improve over time based on sound financial habits. But, again... an $850 car payment is not necessarily crazy per se, if for example, you earn over six figures, and have no other debt. So, DTI is all relative.

By the way, here's a good DTI Calculator, that I've personally found quite useful. It focuses on Affordability.

[Anonymous]

Thank you for the info, it sounds like my best option is going to be keeping the car.

My monthly payment on it is $350. My monthly debt counting all bills is about $820.

It's hard to say exactly what I make as I work freelance and my income varies greatly month to month. But, I'll probably be around $40-50k.

My goal is to put down $10k on a $50-60k home. With keeping the car, should I pay my auto loan down, or save more money for down payment on the house. Guess this topic probably would have been better in mortgage section, but my questions are mainly related to how my auto loan will impact my score so wasn't sure where to post.

[Anonymous]

That DTI calculator is saying I can afford a $96,000 home, but I don't see that happening or being affordable for me.

[Kree]

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@Anonymous wrote:

That DTI calculator is saying I can afford a $96,000 home, but I don't see that happening or being affordable for me.

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Never go with the max if you feel comfortable with less.  Good for you.