Paying off your car loan can potentially increase your credit score in the long run. In the short term, however, paying off your car loan may drop your credit score by a few points especially if closing the account directly weakened your credit mix. A good credit mix is made of revolving credit accounts such as credit cards and personal lines of credit and installment loans such as car loans, mortgages, and student loans.
So, if your car loan was the only installment loan on your credit report, paying it off will potentially weaken your credit mix. Hence, lowering your credit score. But, if there are other installment loans on your credit report, then paying off your car loan will have a minimal impact on your credit score. In fact, paying off your car loan might have a positive impact on your score due to reducing the overall debt which boosts your debt-to-income (DTI) ratio and improves your creditworthiness.
Even if your credit score went lower after paying off your car loan, you can regain those points in a short period of time. All you have to do is to maintain healthy financial habits, such as paying off other outstanding debts, avoiding late payments, and using credit responsibly.
How do car loans affect your credit score?
Car loans affect your credit score through various factors including payment history, credit utilization, length of credit history, credit mix, and new credit inquiries.
Timely payments on your car loan can positively impact your credit score, while late or missed payments will lower it. Payment history affects 35% of your FICO score and 40% of your VantageScore. So, a late car payment can lower your credit score by as much as 180 depending on your credit history and the severity of the late payment, according to credit.com. Additionally, a car loan increases your debt and credit utilization, which can also influence your score depending on how much outstanding debt you have.
Furthermore, when you apply for a car loan, lenders perform a credit check, which may slightly decrease your credit score. Each credit check results in a hard inquiry on your credit report which can lower your credit score by 5 to 6 points on average. However, a well-maintained car loan can contribute to an improved credit mix and payment history, demonstrating responsible credit usage and ultimately enhancing your credit profile.
Lastly, applying for a car loan also affects the age of your credit which is another factor in your credit score calculation. The age of your credit is the average of all credit accounts ages. So, a newer account will result in a lower credit age which may lower your credit score. The age of your credit affects 15% of your FICO score and 21% (age of credit plus credit mix) of your VantageScore.
Will my credit score go down if I pay off my car?
Paying off your car loan early may cause a short-term decrease in your credit score if paying off your loan weakens your credit mix. A good credit mix is made of installment loans such as mortgages, car loans, student loans, and revolving credit such as credit cards and personal lines of credit.
So, when does paying off a car loan lower your credit score? If paying off your loan directly weakens your credit mix, the effect could knock a few points off your credit score. For example, if your car loan was the only installment loan on your credit report, paying it off will weaken your credit mix. Hence, lowering your credit score in the short term.
Keep in mind that paying off your debts always has a long-term positive effect on your credit health.
In fact, paying off your car loan might directly improve your credit score as it reduces your overall debt and boosts your creditworthiness. However, it may slightly impact your credit mix, as having different types of credit accounts is beneficial for your credit score.
Related: How long does it take to improve credit after paying off debt?
Why didn’t my credit score go up when I paid off my car?
Most people are under the impression that paying off their car loans will directly boost their credit scores. Although this is true for the long term, you might see a slight decrease in your credit score after paying off your car loan.
Your car loan is one of the many installment loans you could have on your credit reports. After paying off your car loan, the account will be closed. Meaning that you will no longer benefit from its payment history or credit mix. If you recently paid off your car loans but your credit score did not improve, it is due to several factors.
The following are possible reasons your credit score did not go up after paying off a car loan.
- Paying off your car loan had a negligible impact on one or more factors on your credit score. Your credit score is calculated using various components. Factors on your credit score include payment history, credit utilization, length of credit history, types of credit, and recent inquiries. Paying off your car may have had a minor impact on one of these components but wasn’t enough to increase the overall score.
- It is possible that you recently opened credit accounts. Every time you open a credit account such as a new credit card account, or new loan, your lender runs a credit check. This results in a hard inquiry on your credit report which lowers your credit score by about 5 to 6 points on average.
- You may have negative items on your credit report. Negative items on your credit reports such as late payments, foreclosure, bankruptcy, collections, etc. lower your credit score and impact your credit for a while. If your credit score did not go up after paying off a car loan, a negative item on your credit report may be taking precedence over the positive impact of paying off your car loan. To better understand your credit situation and how to improve your score, it is essential to review your credit report and address any inaccuracies or negative factors.
- Paying off your car loan negatively impacted your credit mix. Although debt payments improve your debt-to-income ratio and boost your credit over time, paying off your car loan can lower your credit score in the short term. For example, if your car loan was the only installment loan, paying it off will leave you with a weak credit mix which will lower your credit score.
How to get a 700 credit score in 30 days?
Having a 700+ credit score is essential when applying for loans. Most lenders trust borrowers with good credit scores as they tend to make timely payments and respect the terms of their loans. If you currently have a bad credit score and want to boost it to over 700 in 30 days, the following are tips you can use.
- Check your credit reports and disputes errors, inaccuracies, and removable negative items, and correct mistakes in your report. The first and foremost important step to get a 700 credit score in 30 days is to check your credit reports. You can get a free copy of your annual credit reports from each major credit reporting bureau once in 12 months. Once, you have the report, read it line by line and dispute errors, inaccuracies, and removable negative items. This alone, can boost your score by a lot of points.
- Avoid late payments. Your payment history affects 35% of your credit score calculations. So, to get a 700 credit score, you need to pay your bills on time. Even if your payment might not be reported to credit bureaus as a late payment until 30 days past due, you will pay interest charges on the balance you carry on revolving credit accounts. So, you can avoid interest charges by simply paying on time and in full.
- Pay down your debts. Paying down your debt can have a major impact on your credit score. Usually too much debt weight your credit health down due to a higher DTI ratio. You can improve your credit score by paying off some of your debts. Focus more attention on revolving credit debts such as credit card debts as paying them off will reduce your credit utilization. Credit utilization is nothing other than how much you have spent compared to the available credit limit. It is best to carry no balance on your credit cards or keep your credit utilization under 6% for maximum benefits on your credit score.
- Become an authorized user of a credit card. One of the fastest ways to get a 700 credit score is to become an authorized user of a good credit card account. By getting added to someone else account, you get to directly benefit from their excellent account activities and credit history which in turn boost your credit score fast.
- Maintain good credit habits. Getting a 700 credit score in 30 days requires you to keep good credit habits. That is you should avoid excessive spending on your credit accounts to maintain a low credit utilization ratio, do not open multiple accounts to avoid hard inquiries, and follow your credit accounts terms by all means.
Related guides:
- How to Raise Your Credit Score in 30 Days?
- How to dispute an error on your credit report?
- How to dispute credit card charges?
- How to get a free annual credit report?
When you pay off your car, does your credit score go up?
When you pay off your car, your credit score may not necessarily go up immediately. While completing a loan payment demonstrates your financial responsibility and reduces your debt, it could also reduce your credit mix, which is a factor considered in credit score calculations. However, maintaining a history of timely payments and using credit responsibly can contribute to a positive credit score increase over time.
You might also like: How to avoid repossession of your car?
How much will my credit score drop after paying off a car?
The drop in credit score after paying off a car loan can vary for each individual, depending on various factors such as payment history, credit utilization, and length of credit history. The type of credit you currently have will also influence the number of points your credit score drops after paying off your car.
For example, if you only have revolving credit accounts on your credit reports due to paying off a car loan, your score will drop. It is also important to note that credit mix affects your credit score only by 10% which is not that much compared to other factors such as payment history at 35%. So, on average, paying off your car loan might drop your credit score by a few points, but it will likely recover over time with responsible credit management.
Why does your credit score drop when you pay off a car loan?
When you pay off a car loan, your credit score may drop due to a few factors. First, it reduces the variety of credit accounts in your report, known as credit mix, which comprises 10% of your credit score. Second, closing the loan may reduce the overall age of your credit accounts, which determines 15% of your score. But, you can easily regain your points by continuously paying off remaining accounts on time and being mindful of how you use your credit accounts.
