Does Paying Off an Installment Loan Early Affect My Credit Score? Does Paying Off an Installment Loan Early Affect My Credit Score? | Equifax Finance Blog

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Does Paying Off an Installment Loan Early Affect My Credit Score?

Written by Equifax Experts on June 25, 2014 in Credit  |   5 comments

If you’re chipping away at a mortgage, auto loan, or student loan, you’re dealing with an installment loan. Unlike credit card bills, which vary depending on the balance you’re carrying and your interest rate, installment loans require that you pay the same amount each month…

does-paying-off-an-installment-loan-early-affect-my-credit-scoreIf you’re chipping away at a mortgage, auto loan, or student loan, you’re dealing with an installment loan. Unlike credit card bills, which vary depending on the balance you’re carrying and your interest rate, installment loans require that you pay the same amount each month for a set period of time until you’ve paid off the full loan amount.

How do installment loans affect my credit score?

Because installment loans diversify the types of debt you accrue and pay, they can positively impact your credit score if you pay them on time. Types of credit used—what kind of credit accounts you have and how many of each—account for approximately 15 percent of your Equifax Credit Score.

So while it may seem like paying off a debt—such as an installment loan—early would reflect positively on your credit score, doing so actually has little impact.

(Read more: Credit FAQs—What Information Is on My Credit Report?)

In fact, a record of steady payments throughout the life of the loan may be more beneficial to your score than paying it off early. Approximately 35 percent of your credit score is based on your payment history, and a history of on-time payments can help you raise your score over time. If you’re making your monthly payments on your installment loans on time and in full, then each month you’re fortifying a healthy credit score.

An open account paid regularly is more beneficial to your credit score than a closed account, which is what your installment loan becomes once it’s paid off.

If you’re skimping on adding to your emergency fund in order to pay off an installment loan quickly, you may want to reconsider. That debt will be there until you pay it off, but an unexpected expense can creep up at any time. It’s better to be prepared for those curveballs than to be completely free of debt.


  1. Jim B. says:

    You guys must work with the banks hand in hand. Your advise suggest it is better to hold on to a loan and its interest rather than paying it off. Solid!

    • Sam says:

      Seriously? That’s what you got out of this? All he said, that’s relevant to your comment, was that an open and active non-delinquent account is better for your credit than a closed and paid off account. So, with that in mind, he was saying that if your paying off your debt early at the expense of having a prudent cash reserve for Emergency situations because you want to improve your credit score, don’t.

  2. hahahaha says:

    hmmm, you realize someone with installment loans can establish a healthy payment history with credit cards, right?

    i feel bad for people who believe this drivel.

  3. Me says:

    A good credit score is great to have in emergencies like if your car breaks down completely and you need to get a new one right away with less down payment that you would like to have. That being said, you would actually be able to save more money faster if you don’t send a good fraction of your paycheck to banks and credit card companies every month.

    Have a small amount of cash stashed away at a bank that isn’t your regular bank, so that it’s more of a hassle to get to. However, most REAL emergencies are why you’re paying monthly for insurance. Other “emergencies” can wait until you’re not hemorrhaging your family’s potential savings and inheritances to make Big Banks richer.

  4. 0 Debt says:

    I only use credit cards for reward points. NEVER carry a balance over. Paid off an auto loan last year and have no other “credit” debt. Just rent, phone, cable which have all been paid on time.
    I want to buy a house next year so I checked my credit score a few months ago – Fine. Just checked it again – it dropped 12 points in just a few months. REASON GIVEN- I HAVE NO INSTALLMENT LOAN DEBT!!! This makes absolutely no sense to me. I want to buy a house next year. I’m NOT going to take out an installment loan and pay interest to keep my credit score from dropping.

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