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Posted in Auto Loans
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TheLacedSmile

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Credit Dropped With Early Pay-Off
I had a car loan for about $6,000. Paid it off in a little over 9 months. Credit score dropped 42 points. How is that possible?

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Loan paid off CLOSED ACCOUNT

While you are paying off the debt on a car loan, the account is open and all account activity (no missed payment, late payment, etc.) wil directly affect your "Payment History" compoment of your credit score, good or bad.  Once the loan is totally paid off, the account is CLOSED.  So you have one less OPEN ACCOUINT creating your payment history.  

If you have very few credit accounts or not much of a mix (only credit cards), closing the auto loan account will lower your score on several components. First, your credit mix (only 10% of score) because lost one type of credit account.  Second, no future payment history to contribute with that closed account. You will need to replace the auto credit account with another account to avoid permanent credit score drop.  Get an installment loan on something (furniture, appliances) to continue building payment history.  Or a low credit limit credit card if you have very few credit accounts.

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