| Hi Taylor
- I have a car loan that I'm financially ready to pay off, but wondering
if it's a smarter decision to keep it around a little longer. Will
paying off the remaining $10,000 right now hurt my credit, or help?
Hi Veronica - I'm glad you're asking this question. I feel
like people get misadvised with how loan repayment can affect your
credit score. There's also a big difference between "hurting" your
credit and "not helping" it. Here are three things to consider in
a situation like yours.
your credit history? This is where people get misled. The
more records you have of steadily repaying lenders, the better
your credit score will be. When you open a new credit card or
take out a new loan, your credit tends to take a minor hit and
then recovers as you make payments. This means taking more time
to pay back your car loan will do a little more to beef up your
credit history. Paying the entire balance now won't hurt your
score, but it will do less to help it.
2. What's the goal? Credit scores are fickle, silly things.
Before you panic about paying off a loan too quickly, you need
to ask yourself what it's all for. Are you trying to build your
credit score in hopes of buying a home or getting financing for
a business? Are you working to recover from a defaulted loan or
some other financial matter that left a blemish on your report?
Have you just heard talk about the importance of a strong credit
score and that's your motivation? You can't base your decision
on what other people have done or some general credit-scoring
formula; your specific situation needs to inform your decision.
3. How are your finances? I almost always encourage people
to pay down debt as fast as possible. The longer you take, the
more you pay in interest and the less you have to invest in your
future. Now, sometimes it makes sense to pay a little extra for
improved credit, but there are other methods that could cost you
less. You might be better served to take care of the entire car
loan and then consistently use and pay down a credit card. If
you don't have an immediate need for an improved credit score,
you should definitely take the action that saves you the most
money, which would be paying off your car loan ASAP.
payments and staying out of debt is always a good thing. Sometimes
there are ways to prolong repayment and boost your credit score
a bit more, but you're almost always better off paying quickly and
saving yourself money. Hope this helps, Veronica!
© Taylor Kovar
February 21, 2019
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