Does paying off my car loan help my credit score? I have heard that paying my car off can help raise my score and others have told me that it really doesn't help that much.
The satisfaction of paying off your car loan can create some incredible emotion, but you will not see a direct impact on your actual credit score.
Where you will see the reward is indirectly through your payment history. Since 35 percent of your credit score is derived from your payment history, how diligently you paid your loan on time, means more than paying it off.
A positive payment history tells future lenders that you take your debts seriously and you intend to pay the due amount on time.
Each time someone pays over 30 days late, a negative remark gets added to their credit report. So having made payments on time over the life of the loan is the thing prospective lenders are going to be looking for.
A car loan is called an installment loan, meaning that it is a secured debt to a lender. If you don't make the payments, the borrower has the ability to repossess the car, sell it and try to reclaim some of the money lost should you default.
This compared to credit cards which may be referred to as revolving, or unsecured debt. 10 percent of your credit report comes from the types of credit you have. A possible lender will check to see how you paid on both types of credit.
In the future, potential lenders will look at how you paid the loan off, hopefully in a timely manner, and will be more likely to grant you a loan if you if you have a good credit rating. This would be an indirect positive impact the next time you go for a car loan.
The payment history of your car loan will remain on your credit report for seven years. As time passes, the positive history will slowly decrease its value of importance to future lenders. To the credit bureaus that compile your FICO score looks at the more recent payment history.
Be aware that lenders are not real diligent at reporting a satisfied loan. The banks are more anxious to concentrate on their car loans that are delinquent than reporting yours as paid off. It may take 30-45 before this loan completion shows on your report. It is suggested that you monitor your report to be sure it has been declared satisfied. If not, contact the credit bureaus and ask that they do what is needed to mark this loan as paid in full.
A positive plan of action once you have paid off your car loan is to use that monthly portion of your budget and begin paying off other unsecured debt, especially the high interest credit cards. Paying these debts down with the money you were using for your car payment will have a positive impact on your credit score.
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