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.
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