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10'000 Hours/Getty Images August 23, 2022 Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Does paying off your car loan early hurt your credit
Paying off your car loan early can hurt your . Any time you close a credit account, your score will fall by a few points. So, while it’s normal, if you are on the edge between two categories, waiting to pay off your car loan may be a good idea if you need to maintain your score for other big purchases. However, your credit score may improve over time. If you have a high debt-to-income (DTI) ratio, paying off a big debt like a car loan could help your credit score. But putting your money toward other goals, like savings or high-interest debt, may be the better route. This is because auto loans tend to benefit your score overall. Cars may be depreciating assets, but building a history of on-time payments will go a long way to maintaining — and improving — your credit score. Paying off your car loan early should only have a small negative impact on your credit score, but ultimately, it will mean you have a more limited ability to build your score over time. 4 ways paying off your auto loan early affects your credit
1 Payment history
Each time you make a timely payment on your car loan, a positive payment history is added to your credit report. Over time, these payments improve your credit score. Paying off a car loan closes the account, so you will no longer be able to build a positive payment history. And while your loan remains on your credit report for up to 10 years, open accounts have a more significant effect on your credit score than closed accounts. They demonstrate how you are currently managing credit, rather than how you did in the past. 2 Credit utilization
Your credit score is based on your access to credit and how much of it you use — your . Paying your loan down over time gradually lowers your credit utilization and could give your credit score a chance to improve. Once your car loan account is paid off, it will no longer count toward your access to credit. This can drastically shift your credit utilization ratio, especially if you have other big debts, which will in turn lower your credit score. 3 Length of credit history
Paid off auto loans only remain on your credit history for up to ten years. It may seem like plenty of time, but once it is removed, your credit score will fall. Lenders want to see a lengthy credit history. If you stay on schedule and pay off your car loan according to your original terms, you will have well over ten years of credit history built up. The lengthier your credit history, the better shot you have at achieving a good or excellent credit score. If you’re working towards building or repairing your credit, it is best to keep the auto loan open to build up a positive credit history. Once you close it, the countdown starts to when it will go off your credit report. 4 Credit mix
Lenders like to see a healthy mix of revolving accounts and installment accounts. Credit cards — revolving accounts — are good for managing your credit utilization, while car loans — installment accounts — are good for building the length of your credit history. If you pay off a car loan early and it is your only installment account, your credit score could take a hit. And if you have very few accounts in general, the hit to your score could be even greater. When to pay your car loan off early
If you can pay off your car loan without hurting other financial goals, you should. That being said, building your emergency fund or paying off high-interest debt should take precedence. Lowering a high debt-to-income ratio is also a good reason to pay off your car loan early. If your DTI is close to or over 50 percent, lenders are unlikely to approve you for more loans. Paying off your car loan will lower your DTI — and make it easier to qualify for a mortgage, new auto loan or credit card. Finally, freeing up funds to boost your nest egg, building wealth through investments or starting a business are all good reasons to pay off your auto loan early. But if your lender , you will need to weigh the costs to determine if it’s a smart financial move. The bottom line
Ultimately, paying off your car loan early can both harm and help your credit score. You should expect a small drop when you first pay off your loan. But you will need to determine if it will improve your credit score over time before committing to an early payoff. Learn more
SHARE: Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. Related Articles