Best Credit Score Strategy to Pay Off New Car Loan?

[BR1]

I recently financed part of a car purchase as a condition to get the out the door price I wanted. I have the cash to pay it off, but am wondering if I can benefit my FICO 2, 4, 5 scores by structuring the pay off a bit while also paying very little interest. 

Ideally my spouse and I would like to buy a house later this year or at some point next year. I understand financing anything wasn’t smart considering that, but our area has extreme inventory issues at the moment which makes mid to late next year more likely. We also have enough non-retirement investments to pay cash if we absolutely had to. Due to the inventory issues we may need to come in with cash offers anyway. Because of those factors I decided to accept the financing for the out the door price I was able to get. 

My questions:

1. Since I only had credit cards on my credit report before now, should I keep the loan around for a certain number of payments before paying it off to establish the loan/a payment history? If I do this I would pay down the majority of the balance immediately to negate interest. 
2. If question #1 is yes, is loan utilization similar to revolving accounts where I could pay 90.5% of the loan today dropping the loan to <10% utilization and benefitting my credit score? This is more for my own knowledge, I'll be paying off 90%-100% now regarldless. 
3. Is there anything else to consider that I’m missing? Ultimately my goal here is to not have paying off the loan tank my score + recover it from the new line of credit ASAP. 

Some extra info: 

• The loan is a simple interest loan with no early payoff penalty. I'm the only one on the loan. The monthly payment is <2% DTI.
• My other credit accounts are just 3 credit cards with low utilization. I never had any late payments, collections, etc. 
• The loan hasn’t hit my credit report yet, but my FICO 8 score after the hard inquiry is 826. 
• When we find a house DTI won’t an issue due to our planned down payment/maximum house price. 

[coldfusion]

Expect to take an initial hit of somewhere around 30-40 points in your FICO8 scores due to the new installment loan reporting at 100% utilization, your other FICO scores will dip as well.    If you treated this as a normal installment loan your scores would organically start to recover in a few months as the loan ages a bit and as you reach certain thresholds as the utilization percentage drops.   You may or may not completely recover your scores back to what they were before you submitted the loan application in around 12-18 months. 

As to whether or not you can accelerate the recovery of your scores and how much you can recover in a shorter time (or even end up boosting them)  there are 2 starter questions to be asked up front:

1)  Is this your only open installment loan?   (credit cards are not considered installment loans)

2) If you prepay an installment does the original due date for each of the remaining installments remain unchanged or are they pulled in e.g. if you pay your May and June installments does the installment now due in July remain as being due in July or would that payment now become due in May?   Some banks and credit unions allow the original due date of subsequent installments to remain,  others pull them in so that the cadence of paying an installment each month remains unbroken.

[BR1]

1. Yes, this is my only installment loan that I've had. 

2. This I'm not sure on this one and I do not remember it being spelled out in the loan contract which I did read thoroughly before signing. The loan is through Toyota Financial Services/Toyota Motor Credit Company. Is there specific wording I should be looking for to determine if it will be pulled in?

The first payment isn't due until mid-May and the loan isn't on my credit report yet. Could making a 90%+ principal payment now prevent the new installment loan from 100% utilization on my report and soften the initial blow?

[FlaDude]

I wouldn't worry too much about the initial score change since utilization has no memory (ignoring FICO 10 score), but if you make a large payment before the first statement cuts, I would expect it to report utilization accordingly.

There is a smallish score penalty for having no open installment loans, since you've taken the hit of opening a new account and corresponding inquiry, I'd try to keep it open until the mortgage process. You might want to call to see paying a large sum will be credited as having made future payments, or if you still need to pay the minimum monthly going forward. My hunch would be the latter, but as @coldfusion said, not all institutions are the same. You might want to pay just 70-80% now if that allows you to keep the loan open longer, you can always make a significant payment later to get utilization where you want it right before you get into the mortgage process.

[coldfusion]

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@FlaDude wrote:

I wouldn't worry too much about the initial score change since utilization has no memory (ignoring FICO 10 score), but if you make a large payment before the first statement cuts, I would expect it to report utilization accordingly.

There is a smallish score penalty for having no open installment loans, since you've taken the hit of opening a new account and corresponding inquiry, I'd try to keep it open until the mortgage process. You might want to call to see paying a large sum will be credited as having made future payments, or if you still need to pay the minimum monthly going forward. My hunch would be the latter, but as @coldfusion said, not all institutions are the same. You might want to pay just 70-80% now if that allows you to keep the loan open longer, you can always make a significant payment later to get utilization where you want it right before you get into the mortgage process.

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That's basically what I was driving at, by immediately making payments against the most recent installments if the due dates for the later installments remain unchanged there should be a boost in scores as soon as the updated remaining balance of the loan is reported.   Having prepayments pulling in the due dates for remaining installments wouldn't be a dealbreaker but would require more finesse and paying attention to timing when getting close to applying for the mortgage, as you wanted to ensure that the loan were paid down and updated balance reported before you submitted your mortgage application(s) without having the loan be closed.    

The reason for confirming there were no other installment loans is that the FICO no-installment-loan penalty (~10-20 points is common) is negated if there is a single installment loan open.  From a scoring perspective there is no additional benefit by having more than 1  open installment loan.

[FicoMike0]

First, with a score of 826, a score improvement won't really help, you're in the top tier.

You are correct that an open installment loans, paid to under 9%, will boost scores. As others have pointed out, since the terms most loans are accelerated when they are prepaid, the timing is tricky. If you have a 60 month loan, prepaying 91% will leave you about .09 X 60 = 5.4 months. So, you have 6 months of score boost, when the loan is pif you lose the boost. 

[BR1]

The 826 is FICO 8, but I imagine my 2, 4 and 5 will be a bit lower. I'm also expecting the 30-40 point drop due to the new loan that others mentioned is coming once it's reported. Once the loan hits I'm planning to purchase the additional report types to see where I'm at. My hope was I could keep the loan around for say 3-6 months and it help my score rebound and stay that way before paying it off fully, but if this isn't the case I'll likely just pay it off now.  

[Thomas_Thumb]

Having an installment loan on file helps credit mix whether it is open or closed. The older Fico "mortgage" models don't penalize for having only closed loans.

Showing positive payment history on installment loans is beneficial. The models prefer to see multiple consecutive months of on time payments.

Yes, if there are open loans on file, Fico does look at aggregate B/L ratio with 9% or less being optimal for Fico score. If aggregate includes a mortgage, ratio can be much higher without hurting score.

In the OP's case, I'd suggest making a few months worth of payments on the Auto loan and paying it down to under 9% or paying it off completely before locking in a mortgage rate. As mentioned, leaving the loan open can help Ficio 8 and later Fico model scores but has minimal benefit with mortgage Ficos. Reducing DTI by paying off the auto loan pre mortgage can be beneficial.

[BR1]

Thank you this is very helpful, I'm really only looking to help out my mortgage FICOs and won't be needing new debt anytime soon after getting a mortgage. 

For the suggestion to make a few months worth of payments do you think 3 would be a good amount or should I do a few more than that? If 3 would something like below work? 

Month 1 - Pay 91% to drop to 9% utilization/get rid of most of the debt. 
Month 2 - Pay regular payment/half of what's left. 

Month 3 - Pay off loan.  

[Thomas_Thumb]

That approach would work. If you take that approach please report back on how your score changes with paydown to 9% and then to $0.

Please note that mortgage lenders will not be using the old Fico 5/4/2 scores in 2026. They will be using Fico 10T and VantageScore 4.0. Those scoring models do penalize for not having an open installment loan file.

If you paydown to 9% can you make small subsequent payments to string out the loan? Assuming you delay home purchase to 2026, longer payment history with an open loan would be best for score.