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Will paying off auto loan lower credit score?

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Will paying off auto loan lower credit score?

Hi everyone. I was planning to pay off my car loan with my income tax return.  However, my husband insists it will drastically lower our credit scores.  Anyone have experience with this?  It is our only loan payment, the only other tradelines we have are credit cards.

 

I'd also ask if you could recommend versatile credit union. I'd like to begin a relationship with one now, so that I have more options with loans/cards long term.  (Auto, mortagage, credit cards and personal loans).

 

Thanks so much for your time, your suggestions.

7 REPLIES 7
Frequent Contributor

Re: Will paying off auto loan lower credit score?


@lovelifeparties wrote:

Hi everyone. I was planning to pay off my car loan with my income tax return.  However, my husband insists it will drastically lower our credit scores.  Anyone have experience with this?  It is our only loan payment, the only other tradelines we have are credit cards.

 

I'd also ask if you could recommend versatile credit union. I'd like to begin a relationship with one now, so that I have more options with loans/cards long term.  (Auto, mortagage, credit cards and personal loans).

 

Thanks so much for your time, your suggestions.


As the only active installment loan, when it is paid off you will probably see a 20-30 point drop.  With your interest in picking up a relationship with a credit union, there is an easy solution to that -- find a good one, and take out a long term secured loan following the principles described is these threads:

 

Adding-an-installment-loan-the-Share-Secure-technique

The Quest for an SSL alternative to Alliant

 

I personally have used this to boost my scores by 28-38 points while I repair credit and prepare for some large loans.  Navy Federal Credit Union is a good choice for this loan type and as a CU in general if you have any family ties to the military or certain types of govt work.

 

Adding an installment loan -- the Share Secure technique - NFCU - Navy Federal Credit Union

 

 

 

 

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Message 2 of 8
Established Contributor

Re: Will paying off auto loan lower credit score?

Whether or not your credit scores drop when you pay off an auto loan (or any installment loan) depends on the thickness of your file.

 

For example, I have a relatively thick file and just paid off a Chase auto loan as part of a refinance. Today when the loan was recorded as paid by Experian, my score didn't change at all. However, if your file is thinner (for instance if you only have one installment loan), then you might see a temporary score drop when you pay off your only loan. YMMV!

 

Message 3 of 8
Established Member

Re: Will paying off auto loan lower credit score?

As I said in a previous thread pay off the loan if you can afford it. Do not pay unnecessary interest and try to "buy" a higher credit score. So what if your score drops 20-30 points, you will gain it back as long as you keep your current open accounts in good standing over time. Also I don't recommend taking out a loan just to raise your score a few points. Again your spending unnecessary money on interest to boost your score a few points. That's money you could put into a savings account. The contents of your credit report are far more important than the actual score. With a good report the scores will follow. Lastly unless your about to finance a large purchase such as a vehicle or home, there's no need to micromanage your score. Just keep the reports clean.
Message 4 of 8
Frequent Contributor

Re: Will paying off auto loan lower credit score?


@KrusteyTheClown wrote:
... you will gain it back as long as you keep your current open accounts in good standing over time. ...

 

That is not how the Credit Mix portion of score calculations work.  Without an active installment loan, those points will never be conferred. 

 

Very few people will have such glowingly positive credit report that an active installment loan would not make a significant difference to their score.

 

 


@KrusteyTheClown wrote:
... Also I don't recommend taking out a loan just to raise your score a few points. Again your spending unnecessary money on interest to boost your score a few points. That's money you could put into a savings account. ...

People spend far more money on less useful things than the $10-50 that might be spent over several years paying interest on the last couple percent of a SS loan.  Buying even a single credit report in preparation for a significant purchase could cost more than the amount of interest that would need to be paid to keep it boosted 20 or more points for years.

 

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Message 5 of 8
New Member

Re: Will paying off auto loan lower credit score?

Thank you everyone for your comments, I sincerely appreciate it.

Message 6 of 8
New Contributor

Re: Will paying off auto loan lower credit score?

First of all Welcome to the Forums, and asking you're question.

 

Paying interest is a killer. Paying someone else is not that fun Smiley Sad. BUT you need to diverse you're credit report. Add a credit card, or something that could boost you're score or keep it going.

 

 

Add a simple credit card to you're wallet. If you are confused on what you can get with a FICO score head over to the credit card section of the forums. There is a lot of people that will help you on finding the best card for you're situation.

Message 7 of 8
New Contributor

Re: Will paying off auto loan lower credit score?

Simple answer: YES. Unfortunately the scoring model doesn't reward you for paying off debt only for paying down debt. I know that sounds ridiculous, but that's a fact. I think it defies common sense, but Mr. Fair and Mr. Isaac not into rewarding you for doing the responsible thing.
However, keep in mind that if you are planning on buying a home, It would look great for your DTI ratio.
Message 8 of 8
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