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Does paying off a car loan raise my credit score?

Does paying off your car loan early help your credit? I’ve been making payments toward my loan for two years now. I want to have more discretionary income, so I can choose to save up to go on a vacation or make other big purchases I’ve been procrastinating. So I’m thinking of paying off my car loan soon, but I’m worried about what that will do to my credit score.

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Phoebe Mah · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
You’re not alone—many people with
car loans
question when to pay it off. Paying off a car loan can allow more breathing space by reducing your monthly expenses.
If you have a higher debt-to-income ratio, paying off a car loan can raise your credit score. But on the other hand, if you are looking to establish credit, paying off the loan won’t help improve your credit.
Every month, if a large portion of your monthly income goes toward making monthly debt payments, this indicates that you have a high debt-to-income ratio (DTI). Paying off your car loan can help reduce your debt and lower your DTI. Then, if you want to take out a loan for a mortgage or another big purchase in the near future, having a lower DTI can increase your chances of getting approved.
Lenders typically prefer a DTI under 31%. But they will still consider applicants with a DTI of 43% and lower.
On the other hand, if you have poor credit and are trying to increase your credit score, continuing to make on-time monthly payments toward your car loan can actually help improve your score.
Since you are looking to have more flexibility with your money, check out how you can cut the cost of car insurance with
Jerry
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Jerry partners with more than 50 insurance companies, but our content is independently researched, written, and fact-checked by our team of editors and agents. We aren’t paid for reviews or other content.

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