Will a Car Payment Affect My Credit Score?
Making your final car payments will reduce your debt but may not benefit your credit scores. To understand why, you should know about the factors that constitute your credit score.
What Makes Up A Credit Score?
FICO is an organization that calculates credit scores for borrowers based on a scale of 300-850 points. This credit score includes the following factors:
Does A Car Loan Affect Your Credit Score?
With a car loan, you make a set installment-based payment each month. When you repay this loan in full, your credit score may take a dip, especially if you have no other credit. Here, the credit mix plays an important role. It is the type of credit accounts that you can maintain every month. Those credit accounts may include credit cards, auto loans and mortgages. You can improve your credit scores by managing all these accounts simultaneously with on-time payments.
At the time of applying for a car loan, your credit utilization will reduce and your credit score will improve due to credit mix. However, as you start paying off your loan, the credit utilization improves while credit scores go down a bit.
Impact of Early Car Payments
Many borrowers think that they will improve their credit scores by paying off their car loan before the due date. This strategy may not always work in your favor. You can end your car loan early if interest rates are extremely high. But, if the loan is already nearing the end of term, early payments may negatively affect your credit score. In this case, it is wise to continue with your auto loan.
When your credit score is high, you can refinance your loan to reduce high-interest rates. Instead of paying it off early, check with your lender for an option to refinance the vehicle. Another important thing to note is the loan agreement.
If the document refers to penalties against early loan payments, do not attempt to close your loan before term. It can be harmful to your credit score. If you can maintain an open line of credit with on-time payments, it will build a strong credit history for you.
You should also note that it is never advisable to delay your car payments. Check your credit reports at regular intervals to keep track of your credit score.