Does paying off a car loan early improve or hurt your credit score?

I want to pay off my car loan a year early, but I've read mixed reviews as to whether it hurts or improves your credit score. Which is it?

Answer
Paying off a car loan (early or on time) can actually have a negative impact on your credit score. The reason that it hurts your credit score is because it lowers your credit mix, which is a combination of installment loans (such as car loans) and revolving credit (such as credit cards).
Furthermore, when your loan ends, you’ll have less credit overall. Credit bureaus actually determine your score by how you’re managing debt, not paying off debt. Keep in mind that this drop is temporary—your credit score should go back to pre-payoff levels in just a few months.
So how do you decide when to pay off your car loan? It depends on your situation:
When you should pay off your car loan early
  • You need to lower your debt-to-income ratio for other large purchases, such as a mortgage
  • Your interest rate is high
  • You already have other installment loans, such as a mortgage or student loans
When you shouldn’t pay off your car loan early
  • You’re near the end of the loan (a year or less)
  • You have a low interest rate
  • When you have no rainy-day or emergency fund
If you decide to keep your car loan but you still want to save money, take a look at your car insurance. By comparing rates on Jerry, you can save some extra cash each month that you can use to pay down your car note or put toward other debt.
Eric Schad
Answered on Nov 17, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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