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To pay off the car or not - that is the question

Frequent Contributor

To pay off the car or not - that is the question

Several people suggested I get the FICO scores, so I did. They are all between 603 and 614. The Score predictor says I should be in the 750-800 range in 1 year which suits me fine, but I somehow don't beleive it. My baddies all drop off in May and June, so the derog TLs will be gone. I will then have a single credit card with a $200 limit and a single digit balance.

 

The question now is - to pay off the car loan or not to pay off the car loan. There is $8500 left, 13 payments made on time (never a late, they take it right out of my bank account). 2 years left on the loan, probable house purchase 15-18 months from now. I have the cash to pay it off today. Should I or is it actually helping me with the score repair? The reason I ask is the last loan I had would give me a point or two while I was making payments and the balance went down, but the second I paid it off I lost 40 points (it was a mortgage).

FICO 8 Scores
2/14/17,EFX - 614, 4 Derogs,TU - 621, 6 Derogs, EXP - 603, 3 Derogs 3/7/17, EFX - 579, TU - 595, EXP - 588, same Derogs 4/8/2017 EFX - 683, TU - 791, EXP - 605 All Chargeoffs removed from TU 5/8/17 EFX 750, TU 796, EXP 625 All chargeoffs removed from EFX 5/15/17 EFX 743; TU 794; EXP 715 6/1/17 EFX 762; TU 794; EXP715 8/15/17 EFX 762; TU 777; EXP 760
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Message 1 of 11
10 REPLIES
Valued Contributor

Re: To pay off the car or not - that is the question

If the auto loan is your only open loan, you will lose some points for not having a 'credit mix'.

 

If you can (not all loans let you do it), pay down your auto loan to less than 9% and keep it open.

 

If you can't, you may want to take a look at the secured loan technique, to open a small $500 loan for 5 years, pay it down to $40 and then pay a few dollares every 4-6 months. This way if you pay your auto loan you will not lose many points (if at all).

Message 2 of 11
Frequent Contributor

Re: To pay off the car or not - that is the question

Paying it down to 9% of the original amount would give me 3 more months (it's only a 36 month loan, and 9% of 36 is 3) of payments so that seems like a waste. It will ding me for not having a credit mix in May instead of now. Ding me now or ding me later, that is the question. Either way you get punished for paying off a loan.

FICO 8 Scores
2/14/17,EFX - 614, 4 Derogs,TU - 621, 6 Derogs, EXP - 603, 3 Derogs 3/7/17, EFX - 579, TU - 595, EXP - 588, same Derogs 4/8/2017 EFX - 683, TU - 791, EXP - 605 All Chargeoffs removed from TU 5/8/17 EFX 750, TU 796, EXP 625 All chargeoffs removed from EFX 5/15/17 EFX 743; TU 794; EXP 715 6/1/17 EFX 762; TU 794; EXP715 8/15/17 EFX 762; TU 777; EXP 760
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Message 3 of 11
Contributor

Re: To pay off the car or not - that is the question

That really depends on the loan. If you pay it down to below 9%, you'll get a good increase in FICO score. One of two things are going to happen. Your payment date will be pushed into the future for a large prepayment or, more likely, your principle will be reduced and your loan length will be shortened. If your loan length is shortened, just get another loan. You can get a secured loan from any credit union. Alliant will give you one for 5 years without a hard pull. 

Filed CH7 BK 4/2015 | Discharge 7/2015
Capital One Platinum $4k | Comenity Capital/Overstock $2k | NFCU cashRewards $1k
Message 4 of 11
Super Contributor

Re: To pay off the car or not - that is the question


Flyingifr wrote:

Several people suggested I get the FICO scores, so I did. They are all between 603 and 614. The Score predictor says I should be in the 750-800 range in 1 year which suits me fine, but I somehow don't beleive it. My baddies all drop off in May and June, so the derog TLs will be gone. I will then have a single credit card with a $200 limit and a single digit balance.

 

The question now is - to pay off the car loan or not to pay off the car loan. There is $8500 left, 13 payments made on time (never a late, they take it right out of my bank account). 2 years left on the loan, probable house purchase 15-18 months from now. I have the cash to pay it off today. Should I or is it actually helping me with the score repair? The reason I ask is the last loan I had would give me a point or two while I was making payments and the balance went down, but the second I paid it off I lost 40 points (it was a mortgage).


You can pay it down to some figure south of 10% but north of zero, and that will be good for your score.

 

But before you pay it down to zero I would suggest getting a share secured loan to take its place in the credit mix:

 

Join Alliant Credit Union, take out a $500+ savings account, take out a $500 share secured loan secured by the savings account with a 48 or 60 month term, decline or cancel autopay, transfer $455 from the savings account towards the loan balance bringing the balance down to $45. Pay that off slowly over the

balance of the term. Once that reports you can pay off the car loan without getting dinged.

FICO8 EQ 721 TU 747 EX 732 Total revolving credit 454000
Message 5 of 11
Established Contributor

Re: To pay off the car or not - that is the question

I always go for lower debt regardless of fico score. You can always counter the lost in points and gain a credit mix by opening a Alliant Shared Secure loan for $500 - pay it down to < 9% to get the points back lost on the car loan and have the peace of mind that the car is paid off.  

gardening til: 02/02/2018..updated: 08/31/2017..rebuild: 02/2016 EQ: 648 TU: 642 EX: 657
Curr. Score (Mortgage): EQ 05: 727, TU 04: 754, EX 02: 789
Goal Score (Mortgage): EQ 05: 760, TU 04: 760, EX 02: 789
Curr. Score (Fico 8): EQ: 760, TU: 770, EX: 809
Goal Score (Fico 8): EQ: 800, TU: 800, EX: 809 - Take the myFICO Fitness Challenge
Message 6 of 11
Community Leader
Senior Contributor

Re: To pay off the car or not - that is the question

Newhis gave you some great advice.  Do both things:

 

(1) Pay your auto loan down to 9% now.  This should get you some extra points.

 

(2) In early March, join Alliant and then begin setting up your 5-year $500 share secure loan with them, paying it down to $44.  By the time your auto loan falls off, your SS loan will be in place, and you will lose no points at all when it falls off.

 

This double-prong plan will increase your score and reduce the amount of interest you pay to a very tiny amount.

 

Finally, once all your derogs are gone, apply for two more cards.  Before you do that you'll want to be sure your existing card has been reporting each month with a balance of $5-15.  In fact, if I were you I'd get that balance reporting in that range now, before you apply for the SS loan.

 

This link will tell you all you need to know about the SS loan process at Alliant:

 

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

 

All you need to do is read the first 2-3 posts in that thread.

Message 7 of 11
Contributor

Re: To pay off the car or not - that is the question

In case you're wondering, Alliant gave all of us some Kool Aid. It was pretty good. Smiley Very Happy

Filed CH7 BK 4/2015 | Discharge 7/2015
Capital One Platinum $4k | Comenity Capital/Overstock $2k | NFCU cashRewards $1k
Message 8 of 11
Senior Contributor

Re: To pay off the car or not - that is the question


Flyingifr wrote:

Either way you get punished for paying off a loan.


No you don't.  You simply lose the bonus you had from having an open installment loan unless you employ the SSL technique as many have mentioned above.  If you do this, your score will not change other than going up when you pay down the $8500 balance to single-digit utilization.

Message 9 of 11
Frequent Contributor

Re: To pay off the car or not - that is the question


BrutalBodyShots wrote:

Flyingifr wrote:

Either way you get punished for paying off a loan.


No you don't.  You simply lose the bonus you had from having an open installment loan unless you employ the SSL technique as many have mentioned above.  If you do this, your score will not change other than going up when you pay down the $8500 balance to single-digit utilization.


 

PLease forgive my thick head, but what is the SSL technique?

FICO 8 Scores
2/14/17,EFX - 614, 4 Derogs,TU - 621, 6 Derogs, EXP - 603, 3 Derogs 3/7/17, EFX - 579, TU - 595, EXP - 588, same Derogs 4/8/2017 EFX - 683, TU - 791, EXP - 605 All Chargeoffs removed from TU 5/8/17 EFX 750, TU 796, EXP 625 All chargeoffs removed from EFX 5/15/17 EFX 743; TU 794; EXP 715 6/1/17 EFX 762; TU 794; EXP715 8/15/17 EFX 762; TU 777; EXP 760
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Message 10 of 11