Pay Off Auto Loan?

[MachoHombre]

Preface:  A few years ago, decent FICO score, financed a car, good rate.   However, I was told it wasn't a total slam dunk because my credit file was very thin.  Only one revolving account, and everything else paid for including mortgage, and no 'term' loans in the last 10years.   I was proud to be in a place where I was paying cash for things but doing so had caught up to me from a lenders' point of view.

Fast forward: 

Went manic on establishing credit, mostly revolvers.     Things are now not as thin, but the car loan is my only 'term' loan.    I owe about  14more payments on it (I'm about 3 payments ahead BTW). I kinda want to pay it off to save a few nickels on the 2.5% loan and to not have any debt.     My FICO is high 700's occassionally bounces into low 800's.   It's not thick, so doesn't take much of a breeze to cause 15point swing +/-

So the question I'm wrestling with:   

Should I pay off my only term loan to save a couple nickels, and be debt free?   Or should I keep this loan open as doing so has a positive affect on my credit score.

I realize not a one size fits all answer, but open to wisdom that might include things I don't know.

[dragontears]

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@MachoHombre wrote:

Preface:  A few years ago, decent FICO score, financed a car, good rate.   However, I was told it wasn't a total slam dunk because my credit file was very thin.  Only one revolving account, and everything else paid for including mortgage, and no 'term' loans in the last 10years.   I was proud to be in a place where I was paying cash for things but doing so had caught up to me from a lenders' point of view.

Fast forward: 

Went manic on establishing credit, mostly revolvers.     Things are now not as thin, but the car loan is my only 'term' loan.    I owe about  14more payments on it (I'm about 3 payments ahead BTW). I kinda want to pay it off to save a few nickels on the 2.5% loan and to not have any debt.     My FICO is high 700's occassionally bounces into low 800's.   It's not thick, so doesn't take much of a breeze to cause 15point swing +/-

So the question I'm wrestling with:   

Should I pay off my only term loan to save a couple nickels, and be debt free?   Or should I keep this loan open as doing so has a positive affect on my credit score.

I realize not a one size fits all answer, but open to wisdom that might include things I don't know.

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Whether to close your only open loan really depends on your personal credit goals, financial goals and tolerance to a drop in score.

What is more important to you, saving some nickels or 20-30 FICO8 points? 

[disdreamin]

Wait, hold on - I think I'm missing something here. I asked a very similar question a few days ago about paying off my auto loan later this year. At that point I will have only revolvers on my active profile. My understanding from the replies to my post was that I should be fine and I wouldn't take much of a hit, if any, but maybe they didn't mean FICO 8 or 9?

So having only revolvers active, no auto or mortgage, will likely result in a 20-30 point drop on FICO 8? I guess it'll be interesting to see what happens, but geez that makes so little sense to me.

[dragontears]

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@disdreamin wrote:

Wait, hold on - I think I'm missing something here. I asked a very similar question a few days ago about paying off my auto loan later this year. At that point I will have only revolvers on my active profile. My understanding from the replies to my post was that I should be fine and I wouldn't take much of a hit, if any, but maybe they didn't mean FICO 8 or 9?

So having only revolvers active, no auto or mortgage, will likely result in a 20-30 point drop on FICO 8? I guess it'll be interesting to see what happens, but geez that makes so little sense to me.

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Was your question/thread referring to mortgage scores? If so, paying off your only open loan will not cause a significant drop in mortgage scores. FICO 8 gives bonus points for having an almost paid off loan which you lose when the loan is paid off. 

[Thomas_Thumb]

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@disdreamin wrote:

Wait, hold on - I think I'm missing something here. I asked a very similar question a few days ago about paying off my auto loan later this year. At that point I will have only revolvers on my active profile. My understanding from the replies to my post was that I should be fine and I wouldn't take much of a hit, if any, but maybe they didn't mean FICO 8 or 9?

So having only revolvers active, no auto or mortgage, will likely result in a 20-30 point drop on FICO 8? I guess it'll be interesting to see what happens, but geez that makes so little sense to me.

---

The score drop, or lack thereof, on Fico 8 and Fico 9 is profile dependent. Established profiles that are "not thin" and not on a new credit scorecard, may experience less impact. Also, the initial drop might lessen in subsequent months. I tested this last November when I paid off my only open loan, a mortgage. Below is my result:

1) EX Fico 8 (with loan, November) = 850 => EX Fico 8 (no loan, now) = 848

2) EX Fico 9 (with loan, November) = 850 => EX Fico 9 (no loan, now) = 849

3) TU Fico 8 (with loan, November) = 850 => TU Fico 8 (no loan, now) = 837

* Loan was at 0.5% B/L prior to payoff and closure.

[disdreamin]

Mine was about FICO scores in general, not mortgage in particular. It'll be interesting to see how big the hit is, I guess. Alas, did not realize the mostly paid loan(s) factored in - kind of ironic to have that be a boost but actually paying it off having the opposite effect, kind of makes me laugh.

OP, I will be very curious what your scores do when you pay off the auto loan. I will also try to remember to report back once my mortgage and auto update to closed as well. More data points for those who enjoy such things, I guess.

[Brian_Earl_Spilner]

If you're planning to app for something in the next 13 months, keep up the score. If not, #FinancesBeforeFICOs

[disdreamin]

It's funny how different the replies here sometimes are. Advice on this thread ranges from saving a bit at the expense of a better FICO score while another says the opposite, finances before FICO. My bottom line has always been finances, tbh, and the FICO has always followed that. This may be the one circumstance where that won't happen and the FICO would take a hit to do what makes more financial sense to me.

OP,  my concern - and perhaps yours too - is what happens if I take that FICO hit (and I'm seeing some people say it can be 60-70 points when I google this - like holy crap!) and need to apply for something before my score has any chance to rebound for any reason. I think it's a valid concern. One never knows what will happen to cause you to need to apply for some type of credit. I am contemplating waiting a bit to pay off my car instead of paying it down ASAP since the rate is super low (interest is about $4-5 a month) and it will cost me more to monitor my FICO than to leave the loan in place for a bit longer. As in all things, your mileage may vary

[Brian_Earl_Spilner]

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@disdreamin wrote:

It's funny how different the replies here sometimes are. Advice on this thread ranges from saving a bit at the expense of a better FICO score while another says the opposite, finances before FICO. My bottom line has always been finances, tbh, and the FICO has always followed that. This may be the one circumstance where that won't happen and the FICO would take a hit to do what makes more financial sense to me.

OP,  my concern - and perhaps yours too - is what happens if I take that FICO hit (and I'm seeing some people say it can be 60-70 points when I google this - like holy crap!) and need to apply for something before my score has any chance to rebound for any reason. I think it's a valid concern. One never knows what will happen to cause you to need to apply for some type of credit. I am contemplating waiting a bit to pay off my car instead of paying it down ASAP since the rate is super low (interest is about $4-5 a month) and it will cost me more to monitor my FICO than to leave the loan in place for a bit longer. As in all things, your mileage may vary

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Not having open installment loans may have hindered our scores, but the trade off of being debt free far outweighed the negatives. Many of our friends and family are jealous of the trips we take or the things we buy, but they really wouldn't be feasible if we weren't debt free. We're not going to charge a 5k vacation and pay that off over a few years. Not having house or car payments meant we could pay cash in a couple of months. 

Credit was designed to pay for things that you can't afford in the moment. If you have no debt, you don't need credit. At that point, it's just maintaining your credit rating for when you do need credit.

[disdreamin]

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@Brian_Earl_Spilner wrote:

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Not having open installment loans may have hindered our scores, but the trade off of being debt free far outweighed the negatives. Many of our friends and family are jealous of the trips we take or the things we buy, but they really wouldn't be feasible if we weren't debt free. We're not going to charge a 5k vacation and pay that off over a few years. Not having house or car payments meant we could pay cash in a couple of months. 

Credit was designed to pay for things that you can't afford in the moment. If you have no debt, you don't need credit. At that point, it's just maintaining your credit rating for when you do need credit.

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I am hoping being debt free won't change our spending habits much, and that it will just allow us to save more eventually. We've taken many vacations despite auto loan(s) and mortgage, and none have involved paying over time. I'm sure our trips weren't as jealousy-inducing as yours since we tend to do National Parks and the like, sometimes with camping thrown in (not even glamping). They were just fun long family road trips, but the memories are priceless! Most of ours were also less than $5k, although one or two might have run into five figures if all expenses were included - that's a little horrifying to type, but all were well worth it.

Back to the topic at hand, after starting this thread, I realized that my concern about scores has to do with eventually wanting to do new construction again. A loan will be needed for that as I highly doubt we will be able to save enough in a few years to PIF, given that we have two kids we hope to cash-flow through college (they have 529's that will cover a good chunk, thankfully). Once our current home sells we should be set to pay off the new construction, but I don't want that contingency hanging over us.

I hope this helps make sense of the predicament I feel like I'm in.