Will Paying Off My Car Help My Credit Score?
If you have an auto loan, then this will obviously impact your credit score in some way. What you may not realize is that paying it off early won’t necessarily raise your credit rating. Paying off a credit card debt would have that sort of positive impact. However, loans on installment plans are considered differently in your credit report and score, meaning that they are unlikely to boost your score significantly.
How It Affects Your Credit Score
While paying off your car won’t necessarily help your credit score, it won’t hurt it, either. It may have a small impact on your score in a positive way, but it shouldn’t be enough to make a difference when getting loans or opening lines of credit in the future. To understand how your auto loan affects your credit score, you need to understand a few important things. Your credit score will typically be better if you have multiple loans and credit accounts, all of which are in good standing. Therefore, if you have an auto loan and remain up to date on payments, this looks good on your report and positively influences the score.
When you pay off a loan, the account will still be considered. In cases of accounts in good standing, like an auto loan that was always paid on time and then paid off early, it will remain on your report for as long as 10 years. By comparison, accounts with late payments may stay for seven years. Essentially, you shouldn’t see a drop in your credit score if you pay off your car early, but you won’t necessarily see an increase, either. It is just another way of showing that you are responsible about making payments. As long as you make your minimum car payments on time, you will see the same benefits as paying it off completely.
Benefits of Paying Off Your Car Loan
Although paying off your car loan early won’t boost your credit score, it can have a few other important benefits that make it well worth doing so. The most obvious reason to do so is that you will no longer have to worry about making your monthly payments, taking away some stress from your life. Paying off the loan early will also reduce your interest payments, as you will no longer be paying interest if there is no balance due. In fact, even paying a little extra each month can lower the interest, since that typically is based on the balance left. Depending on the requirements of your auto loan, you may also be able to lower your amount of insurance coverage since lenders tend to require greater coverage than the legal minimum. Of course, dropping this coverage puts you at risk if a collision occurs, but you will save money every month as your insurance rate drops.
How to Pay Your Auto Loan Early
If you don’t suddenly inherit a large amount of money, there are still ways to pay off your car early and experience the benefits. Try paying just a little extra every month; even rounding up your monthly payment to the nearest $50 can decrease the length of your loan by several months, saving you money on interest. Alternatively, you can try to make a single extra-large payment every year. Any extra money you can put toward your auto loan will help you pay it off sooner and reduce the amount of interest you owe.