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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  |   31 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.

The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.


31 comments

  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.

    • Jonathb says:

      Usually those that are just making ends meet, seem to buy the cars they can least afford. Car Dealers have mastered how to target these vulnerable people. Don’t be one of them!

      Everyone has a choice and if you choose to live below your means and save you will save. That’s a fact!

      Most will say they can’t live below their means because ..(insert some excuse here). How many of these people that simply CAN’T save anything have iPhones, tattoos, brand new cars, Netflix and HBOgo, eat fastfood all the time, etc.

      Of course they look at me like I’m crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from InsurancePanda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).

      We make the beds we lie in. Be responsible for yourself.

      • AmbryLand says:

        LOL! Yes indeed! Humerous, but true! I’m so grateful to have had a sensible state-of-mind so that I could get my credit in order and select wisely before entering into ANY financial contracts. Doing so has helped me get my financial life on track. It is vital that one be honest wuith themselves when assessing their needs.
        Thank you for writing this comment Jonathb. More individuals should be practical like this.

      • Peter W says:

        I too live by these easy rules. A bonus rule is to buy, use and return items that you use once (ie. items for a trip). American garages are full of products used once or twice and then stored. Why not ‘recycle’ them back to the stores they came from for another to use and return. Its totally legal and helps the environment by not stripping the earth’s resources for once used items that head for the landfill ten years later. We Americans spend way too much on way too many things we don’t need.

  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.

    • schoolya says:

      Look up the difference between revolving and installment accounts and the impact of a mix of those accounts on your credit score.

      I feel bad for people that don’t know what they’re talking about.

    • Shane says:

      LOL so your saying that the people that keep track of your credit score are lying to you about how they keep that score, hmmm you go with that…

  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.

    • Cojo says:

      You probably should considering it will make your down payment lower and not to mention raise you’re credit score. Sometimes things don’t make sense but if it helps then honestly what do you have to lose..! Don’t be ignorant

  5. Kevin says:

    Why not just pay your loan of early because it saves you money and get another loan like a credit builder loan or another credit card that you can pay on time every month. Seems simple to me.

  6. Steve says:

    Does it make sense to take out an installment loan, then payoff most of
    it (say, 80%), then continue making payments on the remainder? You would still have the loan on the books, but the balance would be 80% less than the original loan.

    • Edwin says:

      Yes, it will increase your score when you carry small amount of installment debt. I have done it before, just dont pay it off full.

      • Chris L. says:

        Searched this after a 20 point drop in my score after paying off my auto loan.
        Also in the process of buying a Home and thought that freeing up another $700 a month by paying off my car was a good move.
        Apparently not……….
        Wish I would have payed it DOWN instead of OFF.
        Live and learn huh?

  7. Matthew says:

    I found out today my credit score dropped over 20 points in the past 6 months. All I have is a mortgage and a 0% $850 Macy’s credit card balance otherwise I do not carry over any other balances on my cards. Tonight my wife and I are thinking about leasing a new car to get an installment loan in order to raise my scores. Not sure what else to do. What a credit racket.

  8. Matt says:

    Score went from 808 to 768. Dropped 40 points!! Reason. Paid off car loan( always on time over five years) and now have no installment loans on my credit report( don’t have a mortgage either). Nothing else on my report changed. Never missed payment. Debt to credit card ratio id 10% ..Absolutely ridiculous. So being in more debt gave me a higher score. So yes paying off a mortgage/car or bank loan negatively affects your fico score.

  9. Dave says:

    I’ve had similar experience to Matt, above. At one point my credit score was somewhere in the range of 830 through responsible borrowing and whatnot… Over time, I got to a point where I was able to buy my “dream car” and later a new BMW as a daily driver in cash… At which point I wouldn’t allow an inquiry against my name because I was afraid of it adversely affecting the great score I had built.

    Recently, my credit card started offering free credit score monitor, and low and behold, my score had dropped to 735! I was blown away to see my score had gone down 100 points, but the card also offers tips to improve score. One of the tips was that I had no recent installment loans.

    So what did I do? I went and bought a $5000 motorcycle at $0 down and 8% Interest rate (Don’t even get me started on that absurd rate… It was my only option at the time). First, my credit score jumped to 785, simply by opening the account. To avoid paying a lot of interest, I quickly paid the loan down. From what I can tell, my first payment of $3k is all that has registered, and my score now shows up as 802. It’s sure to climb from there. Now the only question is: How long do I want to pay interest to help increase the score further. It’s pretty annoying to have to play this game to keep a good credit score, but it’s good to at least understand how it works.

    Thinking back, I probably should have bought some furniture at 0% interest for the first year and paid it off in 10 months. That would have been the closest thing to a free credit bump (if you don’t count the cost of the furniture, lol).

    Best of luck, borrowers!

    Dave

  10. AW says:

    I’m trying to establish and I guess rebuild credit too. I only have my car loan which will be paid off completely by July 2016 and would like to honestly pay it off a month or 2 early. I haven’t decided yet. I’ve only had credit cards (2) since 2015. Will paying off my car loan a month or 2 early drop my score a whole heap? Or raise it? And what other ways can I increase my score. The goal is 100pts by the end of the year.

    Thanks in advance for all answers.

    • HW from Texas says:

      I paid off a car loan early, with no late payments recently, and my score dropped 78 points. I would imagine you will see the same, if you pay yours off early.

  11. JD says:

    Why doesn’t he advise to pay it down as quick as possible to around 10 dollars that way it will continuously report on time payments while it’s open but the interest accrued during a year even if it was a 16 percent interest charge would be like 2 dollars. The account would stay open payments would be on time technically even though it’s already paid for and you would have to pay the bank very little interest. Some boom like Taco Bell says why not both.

  12. Heather says:

    I’m stuck between a rock and a hard spot situation (and this year has been really rough).

    I am trying to get a mortgage (right now), have been for almost a year. I trusted a credit union that now I realize was not a good idea. Always check everything, read everything, especially fine print!

    My scores are low, not even 620. I have had an installment loan (car) for almost three years and paid on time. I also have a personal installment loan to deal with a bunch of medical bills. I pay them both on time.

    I am required to have certain average credit score for the conventional loan, USDA loan or other types of loans. Yet it all feels so specific and extremely frustrating. I have to purchase the condo I am in. Housing in my state is insane. Prices are insane and nothing is on the market. I have 2 boys and where we live is perfect for us, but the seller (a realtor) wants us out so he can sell it. I am trying hard to make this happen, being tenacious an be rewarding.

    I have a full time job, great work history and going to school at nights (loans are in good standing as well). My income is easily verified.

    I do NOT have a credit card, unlike so many I saw when I was young, I avoided it like the plague. I admit I avoided it due to lack of self-restraint. I knew it was best not to tempt the temptation. It is just like if your hungry, not going grocery shopping or not going down the sweets isle if your trying to lose weight.

    I still don’t have a credit card and though I know I am going to have to get one eventually, I cannot now because I am in the middle of this mortgage acceptance. Nothing new can touch my credit.

    My car loan is ridiculous (and I have realized the hard way that insurance companies are not always good). I pay $437 a month on the loan. I owe just under $14K but the car is only worth around $10-$12K… oh and last December the engine went (hydro lock). So it doesn’t work, I’m paying on a broken car. It is going to cost several thousands to replace the engine. I filed a claim with my insurance (as I pay full coverage and then some) but they denied the claim.

    My mother let me borrow her spare car, which she had insurance on. Then she calls me to say why don’d I put my insurance on the car since I am using it. I did, the morning of having a rock slide. I am lucky to be alive and in shock that the insurance company will not cover it (denied the rock slide claim too, claiming I didn’t have insurance). Filed a claim with DORA, they said they can’t help me. Every turn there is something I have to deal with.

    I feel bitter towards a lot of things I was trying so hard to accomplish. I thought if you worked hard, paid your bills everything works out. Nope. I am by no means perfect, but I have made a lot of changes and accomplished a lot in the last three years. Yet, it feels like it doesn’t matter to the whole big picture of credit scores.

    I had someone commit fraud on a Target card I had last year (that was my one thing I had). I went to the police, filed a report. Went to the credit union and had them shut down the account. They said they had to shut them all down as they were all attached. They did not inform me that it would show new accounts open and old one’s closed. When they did, it looks like I opened a ‘new account’ and the old one’s are closed which affects my credit score. No more 3 year great record for my auto loan, now my score keeps dropping. Oh and they are ‘allowed’ to randomly pull my credit per some agreement they say I agreed to years ago. I always thought a financial institution has to get your permission to pull credit each time. Nope.

    It has been a rough year. I’d like to see the light at the end of the tunnel soon with getting my scores up, paying off debt. I hate having debt. I was very proud of not having a credit card, yet it seems financial institutions are wanting just that. I hate paying high interest, and prefer to pay things off right away.

    My auto loan is hurting my debt to income ratio with HOA fees. I have to pay it off, but if I do, I am worried it will hurt my score even more because they want payment history. Catch 22.

    I do have the 2nd installment loan of around $6600 and making on time payments with it.

    Any suggestions (and no ridicule or rude people please, had enough of a rough year!) Thanks!

  13. Kelly says:

    I have a very good credit up until now. Always paid things on time.

    But now I am so confused. I took a 6k loan (5 years), and I’ve been paying 173$ per month, for 14 months now, the balance is still 5400$, they only used 600$ from all the money paid, for 14 months… towards the balance.

    Now I’m seriously thinking of paying it off, because at the end of the loan apparently I will be paying 4500$ more than the 6000$.

    I will have spend 10K on something that was 6K….

    Reading articles like this scare me, and confuse me on what to do….
    I don’t want a bad credit but I don’t want to waste money paying extra for something that wasn’t worth 10K…

    What should I do?

    • Kelly says:

      Kelly,
      If I was you and I was able, I would make extra payments to pay that loan off early. Maybe don’t pay the entire loan off, maybe 5k, and that’s if you care that much about your score. If you care more about wasting money on interest(like $4500 that could buy something you can see, or put in your savings), then just pay it off. Like Dave Ramsey says, “As long as you have debt, you are a slave to the lender.” He also says “you’re supposed to pay cash for items, so your credit score doesn’t matter.” I’ve had 2 Ch 7’s in my life, credit score in the 400s, and now it’s 775-806, depending on the bureau. I paid off my student loans early, my car(then stupidly traded it in) and am trying now to pay my solar panel loan off early. It’s a 15 year loan, and if I pay on it for 15 years, I’ll pay over $8k in INTEREST.8k for the privilege of the bank loaning me the money.8k could buy my 19 yo son a car.8k could pay down my mortgage. You have to ask yourself-which is more important-a number(credit score) that is calculated in a way that having debt gives you a higher score(ie they want to keep you as a slave to the lender), or the freedom to know that you don’t have to make that payment, AND calculate how many years you’ll be paying just interest on the loan. Do you want to open your window and throw $4500 dollars away, for the sake of a few points on your credit score? I have a gas card I use and pay off monthly.I have a credit card with my credit union I pay off monthly. I started off years ago with a secured credit card. You can always get a store card, and purchase items you can pay off each month. That shows you pay your bills, and if you pay your car off, it still shows that you paid or it, and are capable of making payments. If you lost your income tomorrow, wouldn’t it feel better not to have to worry about that payment? In the beginning of loans, I believe like the first 2 years, most of your payment goes to interest. That’s why your loan balance isn’t going down like you wish it was. Cash is King. Sorry to go on and on and on, but I think you should think about the cash you’ll be “wasting” in interest, and pay the car off. Once it’s paid off, you will always be able to get another auto loan, as long as you don’t have any derogatory items, and you’ll probably get a better interest rate, because you have the history of paying on this car and paying it off. Good luck 🙂


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