Paying off car loan good for credit?

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Topic Author
TheBogleWay
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Paying off car loan good for credit?

Post by TheBogleWay »

Hey All,

Seems like a fairly obvious question but to me it isn't. I currently have 2 car loans. One of them I just realized only has $5k left on it. The payments are small, about $250/month. All my payments are automated and on time.

I'm probably buying a house relatively soon, so what's better for credit?

A) paying off the loan in full today, or...


B) Continuing those on time and full amount payments to show that I don't miss payments?
PFInterest
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Re: Paying off car loan good for credit?

Post by PFInterest »

Both.
Never had a car loan and my credit is 800+.
strafe
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Re: Paying off car loan good for credit?

Post by strafe »

It depends on the ratios of
-debt payments to income, and
-auto loan balance to liquid savings.

If your debt payments are high relative to your income, pay off the car loan.
If you are short on savings / illiquid, do not pay off the loan.

Neither apply? your score is >800 and none of this matters.
Last edited by strafe on Tue Feb 20, 2018 3:20 pm, edited 1 time in total.
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

strafe wrote: Tue Feb 20, 2018 3:12 pm It depends on the ratios of
-debt payments to income, and
-auto loan balance to liquid savings.

If your debt payments are high relative to your income, pay off the car loan.
If you are short on savings / illiquid, pay off the loan.

Neither apply? your score is >800 and none of this matters.

Hmm. Debt payments total about $1,250/month right now (by choice), $250 of that is this car. Income is greater than $250k/year. I'm not sure what you'd consider high.

My net worth is liquid, mostly in stocks. Knowing that you'll be looking at a house soon, what would you do?
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

PFInterest wrote: Tue Feb 20, 2018 3:06 pm Both.
Never had a car loan and my credit is 800+.
...both? You're saying paying it off and not paying it off are both better than the other option for my credit? I'm not sure that makes sense...
strafe
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Re: Paying off car loan good for credit?

Post by strafe »

TheBogleWay wrote: Tue Feb 20, 2018 3:17 pm
strafe wrote: Tue Feb 20, 2018 3:12 pm It depends on the ratios of
-debt payments to income, and
-auto loan balance to liquid savings.

If your debt payments are high relative to your income, pay off the car loan.
If you are short on savings / illiquid, do not pay off the loan.

Neither apply? your score is >800 and none of this matters.

Hmm. Debt payments total about $1,250/month right now (by choice), $250 of that is this car. Income is greater than $250k/year. I'm not sure what you'd consider high.

My net worth is liquid, mostly in stocks. Knowing that you'll be looking at a house soon, what would you do?
In that case the decision to pay off the loan has no bearing on your ability to qualify for the mortgage or rate. You’re overthinking this. Do whatever makes you feel better.
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dm200
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Re: Paying off car loan good for credit?

Post by dm200 »

TheBogleWay wrote: Tue Feb 20, 2018 3:02 pm Hey All,
Seems like a fairly obvious question but to me it isn't. I currently have 2 car loans. One of them I just realized only has $5k left on it. The payments are small, about $250/month. All my payments are automated and on time.
I'm probably buying a house relatively soon, so what's better for credit?
A) paying off the loan in full today, or...
B) Continuing those on time and full amount payments to show that I don't miss payments?
Depends on many factors. Seek guidance/advice from a mortgage loan officer.
PFInterest
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Re: Paying off car loan good for credit?

Post by PFInterest »

TheBogleWay wrote: Tue Feb 20, 2018 3:17 pm
PFInterest wrote: Tue Feb 20, 2018 3:06 pm Both.
Never had a car loan and my credit is 800+.
...both? You're saying paying it off and not paying it off are both better than the other option for my credit? I'm not sure that makes sense...
youre the one debating whether or not taking 2% of your income and paying off a loan matters.
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

PFInterest wrote: Tue Feb 20, 2018 3:26 pm
TheBogleWay wrote: Tue Feb 20, 2018 3:17 pm
PFInterest wrote: Tue Feb 20, 2018 3:06 pm Both.
Never had a car loan and my credit is 800+.
...both? You're saying paying it off and not paying it off are both better than the other option for my credit? I'm not sure that makes sense...
youre the one debating whether or not taking 2% of your income and paying off a loan matters.

Correct, I am asking to see if it matters.

That doesn't change the fact that your answer doesn't make sense? Same with this latest reply actually.

Anyway, thanks to the posters above, sounds like it doesn't make a big difference.
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Doom&Gloom
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Re: Paying off car loan good for credit?

Post by Doom&Gloom »

I don't think it would matter one way or the other either. I would probably pay it off if it would save you any money at all as it would seem to be a nuisance to bother with every month. That assumes that you wouldn't be tempted to fritter away that $250 in cash flow every month, of course.
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

Doom&Gloom wrote: Tue Feb 20, 2018 3:45 pm I don't think it would matter one way or the other either. I would probably pay it off if it would save you any money at all as it would seem to be a nuisance to bother with every month. That assumes that you wouldn't be tempted to fritter away that $250 in cash flow every month, of course.
I don't even think about it most months, auto-pay. I also wouldn't increase spending a bit by paying it off. Extra cash doesn't change my spending really.


Just wondering if it will give me any sort of bump up credit wise.
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

Still hoping for answers on this.


I’m sure it will have some impact on credit and I’m rifht on the line of receiving a better interest rate if I slightly improve, hence my question even though it seems minor.

Thanks!
mortfree
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Re: Paying off car loan good for credit?

Post by mortfree »

if you’re right on the cusp you need to find a credit simulator to help you.

Rumor is that after you payoff a loan your credit score drops a little and then rebounds.

You may want to find that out before you decide
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tmcc
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Re: Paying off car loan good for credit?

Post by tmcc »

I just sold and paid off my second car in january. I have been checking my reports weekly but its still out there. i'll report back with what happens.
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

tmcc wrote: Tue Feb 20, 2018 7:33 pm I just sold and paid off my second car in january. I have been checking my reports weekly but its still out there. i'll report back with what happens.
I've been Googling this today and the first few results I'm seeing are people angry wondering why they paid off an auto loan only to see a significant drop in their score. One article says it may be best to keep it open and on auto-pay like I have it.

Interesting! Maybe I shouldn't pay it off.
madbrain
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Re: Paying off car loan good for credit?

Post by madbrain »

TheBogleWay wrote: Tue Feb 20, 2018 7:49 pm
tmcc wrote: Tue Feb 20, 2018 7:33 pm I just sold and paid off my second car in january. I have been checking my reports weekly but its still out there. i'll report back with what happens.
I've been Googling this today and the first few results I'm seeing are people angry wondering why they paid off an auto loan only to see a significant drop in their score. One article says it may be best to keep it open and on auto-pay like I have it.

Interesting! Maybe I shouldn't pay it off.
Closing accounts affects your credit in terms of average age of credit. Especially if it's a long term car loan.

IMO, the decision to pay off should be based mainly on debt to income ratio and interest rates.
If you are applying for a large mortgage, will $250/month extra cause issue in terms of DTI ratio ? If yes, pay off the car loan. If not, keep it on auto-pay.

The other thing to consider would be the interest rate. If it's a very low rate (<2%), then there may not be any advantage to paying it off. You would be losing liquidity and potential higher earnings than the amount of interest.
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SmileyFace
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Re: Paying off car loan good for credit?

Post by SmileyFace »

Types of credit/debt account for 10% of your score. If you don't have revolving debt your score could drop by up to 10%.
When I paid off my mortgage and no longer had any car loans my score dropped by about 5% and remains in that range - still excellent but not what it was with a car loan.
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

DaftInvestor wrote: Tue Feb 20, 2018 8:16 pm Types of credit/debt account for 10% of your score. If you don't have revolving debt your score could drop by up to 10%.
When I paid off my mortgage and no longer had any car loans my score dropped by about 5% and remains in that range - still excellent but not what it was with a car loan.
That's so weird. I wonder what the logic behind it is.
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SmileyFace
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Re: Paying off car loan good for credit?

Post by SmileyFace »

TheBogleWay wrote: Tue Feb 20, 2018 9:01 pm
DaftInvestor wrote: Tue Feb 20, 2018 8:16 pm Types of credit/debt account for 10% of your score. If you don't have revolving debt your score could drop by up to 10%.
When I paid off my mortgage and no longer had any car loans my score dropped by about 5% and remains in that range - still excellent but not what it was with a car loan.
That's so weird. I wonder what the logic behind it is.
The philosophy is that it measures that you can handle different types of credit- with no recent installment loans they drop your score since there isn't a recent measure.
See the pie chart near the bottom of this article:

https://www.creditsesame.com/blog/credi ... n-equifax/
Topic Author
TheBogleWay
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Re: Paying off car loan good for credit?

Post by TheBogleWay »

^ makes sense, interesting.

I've decided I'll leave the loan open then. Thank you, thread can be closed.
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