Why Paying Off an Auto Loan Won’t Increase Your Score

Have you ever wondered that despite you paying your loans early it does not help you increase your credit score?

I know we all believe that the earlier we pay them back, the good it is for them. But this is all a myth.

Banks want us to pay longer. Why? Because the longer we pay, the higher the interest they are getting from us. But first, we have to understand what type of credit we have, because how we pay our loans has a different effect on our credit scores depending on what type of loan we have.

Our credit report has 5 categories: payment history, amounts owed, length of credit history, types of credit, and new credit. Thirty-five percent of our score has to do with our payment history. Since 35% is our payment history, the longer we are paying, the better. 

So when it comes to credit cards, so long as our accounts are active and open, it increases the percentage of our payment history. So paying off our loans early does not actually hurt our credit. But remind you, it has the biggest fluctuation in terms of score increases and decreases because it is directly associated.

However, when it comes to the installment line of credit, the earlier we pay, the shorter the payment history we have, and the shorter the payment history we have the lower it could pull our 35%. 

Because for example, we have to pay our loan for 60 months, this loan that we have, this has been already agreed on with the credit bureaus and the banks that we’re gonna make this monthly payment, and paying off early will not make a significant impact on our score because it is associated in our payment history.

So the bottom line is when we have an installment line of credit, don’t hurry to pay it off early. What we should make sure of is to pay it on time. Knowing this could help us lessen our stress paying off our loans.

Learn more about it by watching this video. Click here.