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Posted in Auto Loans
If I pay off my car loan entirely, will this help my credit rating
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Question By
gmacmo

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Understanding why your credit score may decline after demonstrating "good behavior", like paying off a debt in full, requires having an accurate viewpoint of what a credit score actually is.  If it was a "good behavior" score, then having 0 debt, a free & clear vehicle and $10K+ in the bank should give you a really high score, right?  It doesn't - quite the opposite.  That's because the score does not rate how prudent you are with your finances. It's based upon how reliable of a profit center (debt slave) you are for the banks. Being debt-free means nothing is being reported on you, making you an unknown commodity for the banks, and therefore "risky" to lend money to since there's no history showing how reliable and compliant of a debt slave you are. However, if you have high income, use lots of credit and have a history of never missing a payment (as I did for decades), banks know that the more they lend you the more you'll pay their exorbitant interest rates like clockwork and be a nice little money-spinning debt slave for them, even when they unilaterally jack up your interest rates as you get more addicted and your debt-to-income ratio narrows.

It is necessary to have some credit history in order to leverage yourself into housing and vehicles, or to have as a 2nd cushion in case of unexpected emergencies (1st being savings, preferably in the form of some cash and mostly precious metals, like gold and silver that doesn't decline in value like cash).  But stash 10% of your weekly income into your savings account and keep the credit line less than $10K and only use up to 30% of it and no more, with automatic payments coming from your savings  That'll give you enough credit history to do whatever leveraging you need and ultimately enough cash for down payments and no-fail timely payments. Beyond that, don't get sucked into the credit addition or ever live beyond your means. It's much easier and a lot less grief to just go make the money you need. Start a business, even if you have a full-time job, and build up the business's credit and enjoy all the tax deductions that come with it, unlike your full-time wage slave job.

If you make a go of the business, then you'll have a an independent source of income, a tax shelter and source for leveraging credit that can't impact you personally (provided it's incorporated), and you can kiss the good little wage-slave, debt-slave, tax-slave dreadmill goodbye for good. Don't let the behavior-mod games (like credit scores) offered by the banks make you a sucker.

Response by
HEQ

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Helpful to 91 out of 96 people

Great response and so very true!  My wife and I talk about this all the time. Your credit score is simply a reflection of how well you BORROW money! No one cares about your credit score when you pay cash! 

Reply by
Saj1nonly

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Helpful to 22 out of 26 people

Well said!!

Reply by
BenjaminI80

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Helpful to 2 out of 2 people

I don't know you personallly, but I just wanted to say,

Thank You!

This was the best and most "honest" answer I have ever heard in regards to how the corporate financial banks look upon their customers. Simply a tool like a hammer to meet thier financial goals. 

I have  small amount going to my direct deposit into savings, and my card is doing auto payments from that account. Now I just have to watch my debt to ratio income spending on the card, and stay under 30% of the limit and start the business part time 2014 to get from under their thumb. 

Thank you agin for being very blunt on how they see us. 

Reply by
Mrviper47

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HEQ,YOU SAID EVERYTHING THE WAY IT SHOULD AND I AGREED WITH EVERYTHING YOU SAID 1,0000000000000000000.00 %

Reply by
CHANFORNETS

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I agree I would rather be debt free, but some times espically for young people starting out, having a very low intrest rate car loan is better than the crazy credit card intrest in showing you can pay a bill on time, ie if you want to buy a house and need a Mortgate like the majority of home buyers will. It will show a reliability to pay back the loan meaning future low intrest payments for such large purchaes

Reply by
Orlandomike

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My score took a hit when I paid off my student loans.  They were the thing bouying up my average length of credit history to 65 months... now I'm down to an average credit history of 26 months.  Apparently you're meant to keep and continue paying on every loan you ever open.  I'll play the game a little, but that's just dumb.  A student loan, though it doesn't seem like it sometimes, will eventually be paid off.

Reply by
WhoopsIPaidInFull

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great advise!

Reply by
Lovelyj420

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no do not pay off your autto loan you need a at least three to four  years of ontime pament history do not close the account the longer the better.

Reply by
dan537063

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Helpful to 3 out of 6 people

Very profound......I never repy but I just had to. In three paragraphs you have summed up exactly what I have thought and practiced for years! What you said about credit score going up when they feel you have potential earning source is , well, true. If I had to wonder though, is would you then use credit exclusively, and paying it off before you pay interest just to keep on the radar?

Reply by
clearymike2

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Helpful to 3 out of 7 people

Educational and yet bits of sarcasm to keep me interested. Very nice.

Reply by
girlygirlrat14

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Helpful to 0 out of 1 people

Does anyone know if the score drops when you pay the auto loan off as scheduled? Not paid early but paid as scheduled. 

Reply by
midnight98

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Helpful to 113 out of 118 people

It may not help your credit rating but you will have "peace of mind"  Never be afraid to pay off debt!!  Debt free is a worry free life :-)

Response by
sybercruzn

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Helpful to 36 out of 42 people

I agree completely. My credit score is in the toilet BUT I have $0 debt. I prefer it this way. I can sleep better rather than constantly worrying about all the bills.

Reply by
pinkpsyche

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Helpful to 17 out of 19 people

I totally agree. That's exactly what i want.. Debt FREEEEE...

Reply by
yani0826

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Are credit scores worth tracking?
Helpful to 71 out of 73 people

In the last 6 months I've paid off 2 installment loans and zeroed out 2 credit cards.  In total I paid off over $25k in loans and credit card balances.  My house is paid off and I'm now less than $3000 in total debt wish a 6 figure income.  Yet my score has gone from a 786 to a 750 in that same time frame. Makes no sense.  I still use credit cards, have not closed any of them and pay them off each month. I use less than 3% of my available credit lines.  I have over 30 years of GOOD/Excellent credit history on my reports. Credit scores are a scam in my opinion.  Are they worth even thinking about?

Response by
PJETX

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Helpful to 46 out of 47 people

I hate saying this but this is one time where i believe some type of federal regulation is required as an oversite on the three credit bureaus. They are allowed to make up their own illogical,ambiguous.and inconsistent guide lines. The public could and should be informed in a very easy to understand format as to what makes for having a good credit score and how to keep it and what determines a lower rating and how to improve it. They have to much power not to be kept an eye on.

Reply by
ballbeater

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Helpful to 26 out of 27 people

But it is how the game is played.  I have noticed with my own credit cards that when i'm using less then 10% of the credit limits the score gets stuck where its at and starts dropping a few points if don't have new debt over 15%.

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Reply by
keoke779

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Helpful to 51 out of 54 people

 Mine keeps going DOWN since I paid off my car! I have very little debt except for my mortgage and all of my payments are100% on-time. This really sucks!

Response by
butchcat

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Helpful to 70 out of 74 people

paying off your car SHOULD NOT ADVERSLY AFFECT YOUR SCORE - but it does also paying off your house.

I watched my score fall 20 points when I paid off my house 13 years early 95K cash.

This whole credit report thing is a scam!!!!!!!!!!!!

Reply by
zunkmahoy

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Helpful to 55 out of 60 people

Do you have any credit cards?  I brought my score up from 550 to 670 in 1.5 years. I am still rebuilding it.  What brought my score down was poor payment history.  I made the mistake of paying off some credit cards I had for a long time and closing them.  Even though I had horrible payment history it brought my score down 30 points.  I have learned to keep credit cards open and I use them now, but I pay them before I accrue interest.  Doing this has rebuilt my credit score quite a bit.  The best thing to do when using credit cards is to keep the balance under 10% of the limit otherwise your score will go down yet again.

Reply by
eviltonytitan

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I agree.  I paid off my car before I retired.  Sold my house and have no dept except for 2  cards whichs I am trying to pay off.  I always thought by having no credit dept , was better than having it.  

I am retired on a low income, so I watch what I spend.  System makes no sense.

Reply by
INKY01

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That is true.  I just added a mortgage, and my score went up.  Makes sense to them I suppose.

Reply by
johninpa

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Helpful to 70 out of 76 people

 No matter what you do, it's going to come back to you. They say you should have no more than a 30% balance on your credit cards. If you increase your limits then you can charge more. BUT, if you increase your limits then this becomes "potential debt" which creditors look at. Paying off your car loan early will most definitely decrease your score. BUT, like others say, you will have more money per month to save or pay off something else. The best route is to become debt free, live with the basics, and pay for everything in cash and no one can take it.

Response by
NA011977

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Helpful to 24 out of 28 people

If only we could. Think of all the damage we could do to all those rats that run our financial lives. 

Reply by
girlygirlrat14

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Helpful to 8 out of 10 people

AMEN to that!

Reply by
pinkpsyche

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It almost seems to me that it is not whether you are a risk but whether they are at risk in giving you money. If you pay off your debt (don't carry a monthly balance) they won't make as much money in interest from you therefore 'investing' in you would be a risk.

Response by
AlanFL

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Helpful to 18 out of 21 people

That would make sense if the lender would be lose money - but they don't.

If one pays off their loans early, the lender still makes money - just not as much.  As opposed to one who defaults on a loan - the lender loses the amount owed minus whatever payments were made before defaulting.

Risk isn't the word you're looking for in this context.

Reply by
minimus1

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Helpful to 6 out of 9 people

Excellent way to put this in perspective Alan. I disagree wholly with minimus; financial institutions and lenders won't make any money off individuals who prevent them from collecting interest. The profit they make from interest is essentially their lifeblood, and if you lend out money and, over the course of a few years, make back little to no interest, not only have you not made a profit, (and that same interest may not have even kept up with inflation, in essence making it a loss) you've also robbed the institution the opportunity cost of using that money elsewhere. This is an undeniable risk.

Reply by
BL990

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i agree!!^^^

Reply by
MRSTEESHRER

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Helpful to 21 out of 22 people

I payed off and it went down 5-10 points. If I knew earlier, I would rather leave debt of $10 and kept paying $1 a month.

Response by
itoropov

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Helpful to 8 out of 9 people

mine actually went up from 680 to 700 and now is 760

Reply by
Sashimiboy

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Helpful to 14 out of 17 people

I actually tried to do this with a SallieMae student loan.  I owed something like 2,500 made a payment of 2,495...

Within a couple of days they had closed the account, simpply writing off the difference. :/

Reply by
cabres3

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14 People Helped

Did your score go up due to paying off an auto loan? Or was it your student loan?

Reply by
hip4u2004

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Lol nice im going to try this, either im going to save five bucks or drag out my loans so my credit score is better

Reply by
GradyZ58

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Did the increase come from paying off a student loan?

Reply by
harrell80

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Helpful to 11 out of 11 people

My score was around 585 1.5 yrs ago. Had 3 late payments on a student loan account (Had 2 different loan accounts. Both pretty low balances) and an old verizon bill in collections for $67 lol

No car payment or motgage.  Nothing to really show credit history except for the loan.  Always dealt in cash and figured I would try to build credit to get a home or whatever in the future.

Applied for a basic card from capital one with a $300 a limit and paid off my collection account and was deleted.  6 months later I applied for a 2nd card and got approved.  low credit limit like $500.  Made all my payments early.

My score started to rise.  Eventually got up to 685 and I was stoked and thought if I payed off the student loan account which had the late pamyents on it i would reduce my debt and have 100% on time payments.  So i did paid about a grand and the account was paid.  I check my credit report and I now have 100% on time payments and reduced my debt but my scrore had dropped from 685-630.  I had closed the oldest account on my record and the age history was poor.

It took 3 more months to get my score back to 685.  I don't know why it jumped back up but it did.  My score is currently at 734.  Still no mortgage or auto loan but I have 6 different credit cards I use sparingly.  I have a couple cash rewards cards I use quite a bit because of the rewards, but I never carry over a balance.  

1.5 yrs ago under 600 with no credit card.   Now im 734 with multiple cards with a combined credit limit over 10k.

My credit history is under 3 yrs >.<

Response by
Getmotivated

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This is right on, I can attest to all of this, including the student loan effect on the oldest account being closed.

 My scores went up around 150 points after doing all these things after CH7 BK discharge in august 2012.  

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Reply by
switchman70

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 Actually,Its annoying but mine went DOWN when I paid my car off. I think it has something to do with "credit mix".

Response by
butchcat

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Helpful to 130 out of 133 people

I paid off my Mustang Cobra in 8 months after I got the loan, I saved thousands of dollars in interest over 15K, but it did not help my credit score. Yes, they look at credit mix and longevity of credit lines! In my case it was worth the major savings, even though it did not help my credit score! I figured at the time I paid off my sports car, that it would look good that I could repay the loan faster then I should have, but actually it back fired according to rules of credit! I feel that TransUnion, Experian, and  Equifax teach iresponsibility, by giving you a better credit score when you have more credit cards and loans you do not need. Also they do not reward and teach a person to be responsible by paying off old debt, instead if you pay off old charged off debt, it will count against you for at least two years after you pay it off! No wonder this country (USA) is so screwed up with finances!

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Reply by
1MeMyselfandI

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Helpful to 52 out of 54 people

Agreed.  te credit system is a## backwards.  I just paid off a car and got no increase  in my credit score.  How ridiculous is that?

Reply by
Egusi724

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Helpful to 4 out of 4 people

I agree totally our credit system in many ways is *** backwards. I reduced the amount of credit on my cards, knowing i would never use nor need but my credit scores went down trying to be responsible also i will never understand that if one exceeds their toatal credit lines by charging more then 30 percent of what my limits are that also lowers ones score regardless that it gets paid off immediately.Also i have only two cards and have been told to have more if i want my score to increase.What a system 

Reply by
ballbeater

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Helpful to 2 out of 2 people

Just pay your credit card down every month and on time. You will see your credit improve in about a year. As to harrassing collectors do not take any calls. You should dispute each letter that you recieve. They will change collectors on you over the same bill but you must dispute it within the 30 day time limit given (ck web for form dispute letter). Make a file of each dispute and sent certified united states mail. THey will drop the harrassment and disputing said letters will prevent them from reporting it on your credit.

Reply by
syncmaster

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Helpful to 2 out of 2 people

You are SO right.  I had about $12k in bad debt that I ended up paying off in full 3 years ago.  My co-worker discharged $700,000 in bankrupcy and 2 years later his credit scores were the same as mine. CRAZY

Reply by
ljdharlan

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Helpful to 2 out of 2 people

wow...thx for that.  I was trying to figure out why my score went down, when I paid my car loan off (early), instead of going up :(

Reply by
tashakelson

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Helpful to 2 out of 2 people

Mine did too! I paid it off over a year early and my credit rating went from 820 to 750. Grrrrrrrrrr!

Reply by
jdotypotts

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Just paid off my car loan also , and my credit score dropped too. Very annoying

Reply by
straw71

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u r so rite the credit ppl look at it *** backwards it a good thing when u pay it in full it 1 less bill u have

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Reply by
krisangelou1274

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same with me then it dropped another 7 points when I paid off my co-signed student loan for my daughter.

Reply by
jamesfacteau

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My credit score went down to 769 from 780 when I paid off a couple of accounts....weird.

Reply by
geeuh

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It's all bout the banks making their money....If you pay a bebt off sooner the bank does not make the interest.....So why would they reward you...The credit bureaus and the banks are in bed together to screw us over! The only time they increase your score is when CEO's look at there bonus and think it needs to be bigger. So they give the responible consumer a better score so they will borrow more and pay there bill on time. Which in-turn there bonus is bigger!  Banks just want to milk us as long as they can. I don't see that ever changing either. In our own way we are just like them. We want to make as much money as we can anyway possible.

Reply by
j120v

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but thats because the ability to hold credit and keep a line of credit open while making on time payments, is being responsible. So if you pay something off real quick, your not proving that you can possess credit but that you have enough money to just buy whatever it is you were using credit for.

Reply by
Natedog989

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I just asked the same question...I paid off my Honda CRV-LX a year early yet my credit score barely improved at all, but I did get financed for a newer vehicle that I've had a year now thru a different finance company...not my OWN credit union, so what's up with that? I thought I was doing a positive thing, since my credit has always been crappy since I was a young teen! Now 40 years later, still dealing with the same BS and really not a whole lot to show for it..I'm in limbo as well as trying to jumpstart my credit up again, just not sure how to go about it and I absolutely REFUSE to talk to harrassing collectors over the phone..a major mistake in itself :)

Reply by
Only1Ghiwawa

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11 People Helped

Thanks for that information. My credit score went from 604 to 599 in the space of 5 days, and i paid of my car a year early ie 5 years instead of 6. Saving 4375 a month so to hell with the lower credit score. Also starting to reduce my credit card bills, so i am sure it will go down again!!

Reply by
celtic70

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Mine too!  And I was close to 840, went to 682 (fair)

Reply by
Kimmie1289

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Mine did too :(

Reply by
yanaostrovska

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Helpful to 17 out of 19 people

 Under the new credit act passed last year, it's a merry goround to understand what is going on.  My suggestion is keep on checking your score and request one report from one of the credit bureaus at different times of the year. One in Janruary, june and October.  I check online at annual credit report.com

and dispute questionable accounts immediately.  It's great to be able to check your scores for free, because they change daily. You can be at 840 one day and 750 the next.  Especially, watch out when you go to buy a car, with a small lean on your old one.  This lowers your score as the dealer tries to find  the best financing deal for you!!!!  rots of ruck

Response by
flowers1020

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