Paying off auto loan early...effect on Credit Score

[Anonymous]

My credit history is barely for 6 months. I have 1 credit card and I've recently got an auto loan for $10k. The duration of the loan is 36 months. Since I want to build strong credit (in the long run), I'd like to know what effect paying off the auto loan in 15-18months will have on my credit score. I know that I will pay less interest if I pay off the loan sooner but I will only decide on doing so if it has a favorable effect on my credit score.

Thanks in advance...

[p-]

---

@Anonymous wrote:

My credit history is barely for 6 months. I have 1 credit card and I've recently got an auto loan for $10k. The duration of the loan is 36 months. Since I want to build strong credit (in the long run), I'd like to know what effect paying off the auto loan in 15-18months will have on my credit score. I know that I will pay less interest if I pay off the loan sooner but I will only decide on doing so if it has a favorable effect on my credit score.

Thanks in advance...

---

Your AAOA will not change, as the account will still report.  It will likely fall off at ten years from closing date, whick means it will fall off slightly faster.  Otherwise the long term effects are not negative.  I'd pay early if possible.

But you'll want to make sure you have other open accounts when that one closes, i.e. credit cards.  If it is your only open one, your short term score will take a dive. 

[DrJim]

My thought is always pay it off early.  My goal is not a high FICO score, it is financial health.  A CS is only part of that.  It's like saying "Yeah, I have cancer, but have you seen my BP?!"  You save money by paying it off early and no one can repossess a paid off car if things go south.  Plus, you have better cash flow once you no longer have that payment.

If you want to increase your score in the future open up two or three more revolving lines, pay them in full each month and let them age.

We obsess about scores here, but forget it is only one small part of financial health.

[CreditDunce]

You have gotten some great advice.  The money saved is worth more than the any hit to your credit.

To recap,  a new autoloan will hurt your score a little.  In 6 months or so, your score should be recover and climb higher.  If you make all of your payments on time,  your autoloan will be a positive account for 10 years after you pay it off.    If you pay it off in 2 years, it will drop off in 2026.  If you pay it off in 3 years it will drop off in 2027.

If you pay off the autoloan and do not have any other installment loans, your score will probably drop in FICO 08 models.  Opening a small secured shared loan 6 months before you pay off the loan could be a way to minimize the drop.  However, it probably will not be necessary.  If you are using credit wisely and paying your bills, your credit score will mostly take care of itself.

Once you have a good years worth of credit history it will be time to start looking for a couple of other credit cards.  You want credit cards that you will be able to keep for many years.  For me that means no AF with a CCC that allows PC.   You want to aim for 3 credit cards.   There is no penalty for having more, but it doesn't help your score either.  Only get more if you have a use for the card and it is not too difficult to keep track of all of the due dates.  Adding an Amex to establish your MSD wouldn't be a bad idea either, once you qualify.

[Anonymous]

Thanks a ton for great, helpful replies! This really helps.

CreditDunce, one quick question, what do you mean when you say "For me that means no AF with a CCC that allows PC". Apologies, but I really don't understand the abbreviations.

[CreditDunce]

---

CreditDunce, one quick question, what do you mean when you say "For me that means no AF with a CCC that allows PC". Apologies, but I really don't understand the abbreviations.

---

I am sorry for not being very clear.

For the credit cards I plan to keep forever, I want cards that do not charge an Annual Fee (AF).   The AF may be worth it right now.  But in 10 years, either the card or my spending patterns may be different.  But your score is really helped by keeping old credit cards around even if you do not use them very much.

Some Credit Card Companies (CCC) make it easy to do product changes (PC).  Other CCC's do not.  For example, the Credit Union (CU)  that I have oldest (apart from a back dated Amex), do not do product changes.  My "gold" credit card earns points worth about .5c each for merchandise.  At the time it was a competitive rewards system.  Their current credit card is a 321 cash back credit card almost identical to the BoA Cash Rewards without a cap and no 10% bonus.  They would be happy to upgrade me to the current card, but it will be a new account.   In 10 years, the old credit card would drop off my credit report and my perfect 18 year payment history would disappear.

On the other hand, BoA makes it very easy to PC one card to another card.   When a new card comes out, I can transfer my entire credit history to the new card.  I wouldn't have to keep an obsolete card around simply because it is my oldest card.  If you have a couple credit cards from different CCC's of about the same age, it also would give you more flexibility as the different programs change.

In my earlier post, I implied it will not make much difference to your long term credit score by paying off your loan early.  Credit cards are a little different in that they can become your oldest trade lines.  Installment loans will eventually be paid off.  You can keep a credit card line open for the rest of your life.

[Anonymous]

Thank you for that awesome clarification, CreditDunce!