@Interestedincredit wrote:
What would the effect of closing (paying off) a personal loan that was opened in January. Original loan balance was 4580, and I'm right around 2600 owed now. I wanted to pay off with a BT check from NASA.
Thank you very much for your help.
Hard to tell.
Conventionally, you will see a drop in score for paying off an installment loan, early or otherwise. By paying it off, you are no longer showing that you have the capability to manage that particular tradeline. It's a little counter-intuitive, but it does make a little sense when you consider that you're no longer building a payment history month after month.
How much of a drop, and how quickly you'll rebound depends on the rest of your file.
If you're rebuilding, and have a thin file, you might reconsider paying it off right now. Each monthly payment builds an additional data point, and overall, will pad your percentage of on-time payments, which plays a much larger role in your score than short-term changes. That in turn will bring your score up, and help to keep it up and weather dips in score more easily when they happen from things like inquiries, pay-offs, etc.
On the other hand, if your file is thicker and in good shape, and the interest rate on the loan is sufficiently high (or, you have another valid reason, like maybe moving out changing jobs for a lower-paying but more fulfilling one, and you're concerned about keeping up with payments long term) then the more sound decision, in terms of dollars and cents, will be to pay now. Another good reason to possibly pay it off now is where you got the loan from? If it was a traditional bank or credit union, then it might be fine to keep it for the reason of building payment history. However, if it's a payday loan, or from a consumer finance company like Lending Tree or Prosper, then those tips of loans can have a slightly negative impact because of the type of loan (however, I think the impact is greater if you have an otherwise clean file, and again, you still might be better off building the payment history.)
So, it really depends on which is more important: building a payment history to lay a foundation for good credit, or saving money?
