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 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.
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