How many points will I loose if I sell my car and close the account early?

[Anonymous]

I am in the process of purchasing a home.  I would like to sell my car to improve my DTI.  How many points will I loose on my credit score for closing an installment account?

[GregB]

You should gain points.

Did you think you would no longer have a good mix of accounts? 

You still have the experience of the account, which will stay on your reports for 10 years. You will owe less money.

FICO is a score that tells a lender how much risk you have regarding a new loan. The less you owe, the better the risk if all other factors remain the same.

[daisyduke]

Hi Greg,

That is not what I heard about auto loans, paying them off early...

IF you only have ONE installment loan on your credit report and you pay it off early, it could hurt you because you lose the mix of credit. I could be wrong, but this is what i thought was true.

In the mortgage scenario, it will probably look better for a potential lender on a manual review b/c there will not the outstanding monthly payment...but you could lose FICO points...

I am not so sure that installment loans should be paid off early.... All I know...I had a car and traded it in for another car - negative equity - the new company that paid off the existing loan, paid if every month....as if I had two auto loans at the same time...and it matured as it should have and closed when it was due to close...it was not a Paid in Full closed early deal....

[llecs]

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daisyduke wrote:

Hi Greg,

IF you only have ONE installment loan on your credit report and you pay it off early, it could hurt you because you lose the mix of credit. I could be wrong, but this is what i thought was true.

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YMMV based on your scoring bucket. I paid off my last installment loan in the spring. Brought the installment utilization from 20-25% down to 0% in one month and pulled the 2 FICO scores the day before it reported and the day after it reported. TU dropped by 5 points and EQ increased by 7 points. In other words, it helped TU but hurt EQ.

[daisyduke]

Illecs, thanks for that message. Two different scoring models....I guess I could pay off my lease early in two months versus three and see what happens!

[GregB]

I was thinking that the "mix" remains since the account stays on your credit report.

Surely FICO does not reward someone for having a car loan with a current balance. It makes you a bigger risk to buy a car that you can't afford so that you have to finance it. It is higher risk that you would not continue to drive that car after it has been paid off. This is perhaps lower risk than owing a significant amount on a credit card. FICO is supposed to represent your risk in taking on new debt.

I financed a new car in 2005 on a $0 down 60 month loan. Each time I had extra money, like from selling my previous vehicle, I paid down the principal to the point where I owed about 50% after 14 months. I then paid off the rest with a CC BT at 0%. I didn't notice any significant change up or down for any of those actions so I'm thinking any change was 10 points or less. 

[daisyduke]

I think FICO likes to see a mix of credit well managed. FICO doesn't know our income therefore there is no algorithm in place to determine debt to income, only debt to credit ratio. As far as financing a car, the auto finance company will ask how much you earn, look at your credit report and determine if you can afford a car..

I might try to pay off my lease in two months instead of the three months I have left just for purely experimental purposes. I would need to keep everything the same however to really determine the total affect. but everybody is different....

[Anonymous]

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@GregB wrote:

I was thinking that the "mix" remains since the account stays on your credit report.

Surely FICO does not reward someone for having a car loan with a current balance. It makes you a bigger risk to buy a car that you can't afford so that you have to finance it. It is higher risk that you would not continue to drive that car after it has been paid off. This is perhaps lower risk than owing a significant amount on a credit card. FICO is supposed to represent your risk in taking on new debt.

I financed a new car in 2005 on a $0 down 60 month loan. Each time I had extra money, like from selling my previous vehicle, I paid down the principal to the point where I owed about 50% after 14 months. I then paid off the rest with a CC BT at 0%. I didn't notice any significant change up or down for any of those actions so I'm thinking any change was 10 points or less. 

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When the installment loan is paid off, its history remains on your credit report. It no longer reflects in the "mix" as it is essentally a closed account/transaction.


Which accounts why most people see a negligible score drop when one is paid off.

As installment loans are paid off, as the remaining balance raches certain levels it does effect your credit score to the positive.(but that could also be simply attributed to account age as well) 

the PIF score drop is offset by the free-ed up monthly income.

That does not so much reflect on FICO but on a review of a persons file when issuing a big loan.

[Anonymous]

My credit score went up 13 points!  I think this is because I have student loans I am paying off still, they help me have the mix still. 

[tonsers]

I paid off my only installment account (car loan) when I received my tax return - about $5000 - and took about a 10 point hit.  That was before I started reading these forums... I thought I was doing a good thing by paying off debt.

If I had it to do over, I would have paid it way down but left it open.