@Anonymous wrote:
Just another newbie question... why full term? What is the benefit vs. paying it off in say six months? Other than the obvious of not having a installment loan. And, once you have an installment loan, and it's paid, I'm guessing it doesn't count for ten years like a credit card would if closed??
So much to learn.... **sigh**
Three reasons. First, you get more FICO points for having an open installment loan than having a closed one -- even if you owe a lot on the loan. This factor belongs to the "Types of Credit" category (10%).
Second, you get points for having most of your total installment debt paid off. This factor belongs to the Amounts Owed category (30%). FICO calculates this in a way that is analagous to total credit card utilization. It adds up the amounts you currently owe on all your open non-mortgage installment loans and compares it to the sum of all the original amounts. So by keeping it open but also having paid off much of the principal you are getting some nice points from this category.
For reasons 1 and 2, as soon as the loan is paid off, you that FICO benefit.
Third, and this reason will only help you way down the road, it will improve your AAoA ten years from now if you carry the loan out. Compare two installment loans taken out on the same day, each having a term of five years. Loan A is paid off after six months. Loan B is paid off at the end of five years. 10 years after loan A is paid off, it vanishes from your credit reports, giving you no further help with your AAoA. And even in the last year, it was helping you only as a ten year old account. But, in the 4.5 years after Loan A vanishes, Loan B is still chugging along, helping you as an 11 year account, then a 12, then a 13, then a 14, all the way up to being a 15 year old account before it finally drops off.
