How much does paying off a car loan help your credit?

I’ve realized I’m reaching the end of my car loan and I can afford to pay the rest of it off. However, I want to get a house, and I’d like to get rid of my car loan before working on that. Will paying off my car loan help my credit?

Answer
Congratulations on reaching the end of your car loan! You would think that paying off your debts would be a good thing, but credit is weird, and this is one of those cases where it’s so peculiar.
When you pay off a loan, it causes a dip in your credit.
Depending on your credit portfolio (aka, how old your credit history is) and if you have many different types of loans (school loans and/or credit cards), you’re usually fine.
But if your portfolio is thin, then you’ll see a more considerable dip in your credit once you pay it off. Let’s say your car loan is the first loan you’ve had in your life and you didn’t have a credit card or student loans. Paying off the car loan would have a much larger impact on your credit in this situation.
That said, paying off your loan can still benefit you because you want to get a mortgage. Despite the potential dip in your score, you’ll have a better debt-to-income ratio (DTI). Because you’ll have less debt, you’ll have an easier time getting a mortgage.
When you do pay off your car, keep in mind that you won’t have to keep your full coverage policy (lenders require this). That means you can add money to your wallet for your upcoming mortgage.
If you want help changing your policy and shopping for better rates on car insurance, try the Jerry app. Jerry compares personalized rates from the top 50 providers and delivers the best deals to your phone in minutes for free. The average Jerry user saves $879 a year on car insurance.
Lauren Smith
Answered on Oct 29, 2021
Lauren has written for World Nomads, the Matador Network, Korvia Consulting, and once upon a time Three Fates Games. She graduated from Columbia College of Chicago with a BFA in Creative Writing. After graduating, she moved overseas and lived in South Korea where she spent her free time traveling and going on road trips with friends. She misses the rest stop potatoes and is trying to figure out how to recreate them at home. She's now based outside of Chicago and when she's not writing she spends her free time reading, playing video games, and exploring whenever she can.
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