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I recently got a 5 year car loan and due to finish it off in 2021. At my place of employment we have overtime available (although not lately but will soon) and thinking of making extra car payments every once in a while.
My question is, if I finish my car loan early, will that affect my credit score negatively? Or should I just pay it off until 2021? With overtime at work, I could pay it off by 2020, perhaps 2019.
I recently got a 5 year car loan and due to finish it off in 2021. At my place of employment we have overtime available (although not lately but will soon) and thinking of making extra car payments every once in a while.
My question is, if I finish my car loan early, will that affect my credit score negatively? Or should I just pay it off until 2021? With overtime at work, I could pay it off by 2020, perhaps 2019.
Is this number more important than the expense of 1-2 years of interest? If to you it is, pay as agreed to and keep those points. If the saved money is more important, take the temporary tiny hit.
Your FICO is an industry assigned score on how predictable you are with credit. Pay as agreed score goes up, you are being predictable they are getting all the principal and interest that was expected at origination. Pay ahead, being less predictable and institutions are not getting the full amount they planned on, score goes down a little. Pay late or not at all, again not predictable and more dangerous to loan too, score goes down allot.
Every potential creditor can look at different elements of your credit score. However one thing that is almost always weighed heavily is your credit usage ratio (usually 30% of your score). They want it below 30% usage. Some want it below 18%. Some 50%.
Thus if you have a car loan for $10,000 and you owe $2,000 you are well below the 30% usage figure and it helps your score a lot. Pay off that $2000 and close the account and you no longer have an account that is below 30% usage, so the credit utilization portion of your credit score becomes dependent on your other debt. Let's say your only other debt is a credit card with a limit of $1,000 and you owe $800 on it. With your car loan, you are still below 30% of your total credit usage. Pay off the car loan and you are at 80%. That gives you a very bad score for 1/3 of your overall credit score. Pay off the $800 and you go back to a good utilization score and your credit will jump back up.
The credit companies do not know the terms of your car loan and do not know or care whether you pay it early. They do care whether the account is open or closed as this impacts your credit usage ratio. They look at certain fixed factors (or their computer does). The impact paying off your car loan early has on your credit score depends on the amount of the loan and the condition of your other credit accounts. The ideal solution would be to pay down your car loan to $100 (or less) and then pay off the balance in monthly increments - if the lender will allow that. That way you keep an open account that is well below the available limit and it will help your credit score, but you pay only a tiny amount of interest. However some lenders will insist that you pay the scheduled monthly amount each month, up to the balance of the loan. If so, then you either have to pay it off and take the hit, or pay the interest.
Another solution is to replace the car loan with a credit card with the same or higher limits and then just keep a tiny balance on the credit card.
Just getting a bunch of credit cards and barely using them will improve your credit score to a point. At some point your income to credit ratio will adversely impact your credit score ad that is another very big factor. Usually, it is pretty easy to keep your income to credit ratio to a good number and still improve your credit usage ratio by adding credit accounts to replace the car loan.
Another item they sometimes look at is the average age of your credit accounts. Thus, if your car loan was five years old and your credit card is only 1 year old, paying off your car loan will have a significant impact on your average age factor. Here some creditors want to see a mix of older accounts and newer accounts, so paying off your only new account can also have a negative impact.
Because each type of creditor analyzes different data with different weight given to any item, your credit score will vary wildly depending on whether you are applying for a mortgage, line of credit, car loan, credit card or something else. Thus, scores from places like Kredit Karma are usually meaningless. All they really do is let you know the trend in your score (i.e. if it moves substantially up or down). In may experience, Kredit Karma always gives you a substantially higher score (by 20 - 50 points), than you will get from a potential lender. Thus, if Kredit Karma has you at 720, you may be at 670 to lender and it may be difficult to get a good rate on a loan. Credit card companies tend to use different data and they will often report a higher score than a mortgage lender. There is no single fixed score. It all depends on what data is used and how the items are weighed.
There are online apps that allow you to input proposed changes to your credit accounts and see the impact (I think kredit Karma is one). While this is a helpful tool for planning, it is not reliable. Sometimes the change you prpose carries no weight for the type of loan you are seeking. Thus while KK may tell you doing X will raise or lower your credit score, with any different type of lender it may have no effect, or even the opposite impact. In general however, the KK trend will reflect reality, but it is usually not tot he same extent as KK shows.
Last edited by Coldjensens; 08-02-2016 at 09:52 AM..
Your FICO is an industry assigned score on how predictable you are with credit. Pay as agreed score goes up, you are being predictable they are getting all the principal and interest that was expected at origination. Pay ahead, being less predictable and institutions are not getting the full amount they planned on, score goes down a little. Pay late or not at all, again not predictable and more dangerous to loan too, score goes down allot.
thanks for your insight. Does that apply to mortgages too?
I recently got a 5 year car loan and due to finish it off in 2021. At my place of employment we have overtime available (although not lately but will soon) and thinking of making extra car payments every once in a while.
My question is, if I finish my car loan early, will that affect my credit score negatively? Or should I just pay it off until 2021? With overtime at work, I could pay it off by 2020, perhaps 2019.
As long as it is not your ONLY credit account you are using, and as long as you are using your other credit responsibly (paying on time, not using too large a percentage of limits), I wouldn't worry about it. I highly doubt that keeping the loan open could save you more than it would cost in otherwise useless interest payments.
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