After you complete a car loan, you may not see a boost in your credit score – it may actually be the opposite. However, it’s usually a temporary dip.
Impact of Paying Off an Auto Loan
Once you pay off a car loan, you may actually see a small drop in your credit score. However, it’s normally temporary if your credit history is in decent shape – it bounces back eventually. The reason your credit score takes a temporary hit in points is that you ended an active credit account. The credit-scoring models favor borrowers with active accounts vs. closed ones.
While you may see a slight drop in points right after you complete the loan, your past, on-time car payments remain on your credit reports for up to ten years. Those timely payments continue to positively influence your credit score during that time. If you have missed or late payments on the auto loan, those negative marks impact your credit for up to seven years.
The impact of paying off your car loan could have a bigger influence on your credit score if you have a thin file, which means a sparse credit history. If your auto loan is the only thing being actively reported on your credit reports, then completing the loan could harm your credit score a little more than someone else with a variety of active credit because you closed your only or one of your only active accounts.
Don’t Fret About the Temporary Drop in Points!
As we said, active credit has a better impact on your credit score than past closed accounts. However, while your credit score may go down for a little while after you complete the loan, when you apply for future vehicle financing your past completed auto loan(s) look great on your credit reports if you maintained a good payment history.
Because you paid off your car loan, it tells auto lenders that you were able to fulfill your obligations successfully. This means you probably have a higher chance of qualifying for future credit because you’ve proven your ability to repay loans.
Most auto lenders don’t just consider your creditworthiness from your credit score, but your credit reports as a whole. This applies to subprime lenders as well, and they’re lenders that specialize in assisting borrowers with credit challenges. A past car loan that had a great payment history and was completed may mean more to a lender than your credit score, depending on the lender.
Parts of Your Credit Score
Your FICO credit score is the most commonly used model out there, so it’s important to know what impacts your credit score and what doesn’t. Paying off your loans, making payments on time, and maintaining a healthy mix of credit are all great ways to improve your credit score.
Here are some other things that all play a part in your credit score:
- Length of your credit history – How long you’ve had credit matters and it makes up 15% of your credit score. The longer you’ve had active credit accounts, the better. For this reason, keep old credit cards open even if you don’t use them because closing them can hurt your average credit age and lower your score.
- Pay all your bills on time – Almost every bill you have has the potential to be reported on your credit reports. If you miss a payment on a bill, that creditor can report that missed payment to the credit bureaus and hurt your credit – even if the on-time payments have never been reported before. Payment history makes up 35% of your credit score, so it’s the most influential factor.
- Have a variety of credit active – A good variety of credit on your credit reports is a good way to improve your credit score, too. Having active revolving credit (credit cards) and installment loans (auto loans) both on your credit reports tells the credit scoring models that you’re able to handle different kinds of credit, so it improves your credit score.
Some things that don’t impact your credit score include:
- Your employment status – Your work history may be on your credit reports for identification purposes, but whether or not you are currently employed has no bearing on your credit score. As long as your accounts are being paid on time, your current employment status doesn’t matter.
- Personal information – Things like your age, sex, marital status, and where you live don’t impact your credit score.
- Your income type – Where you get your income from doesn’t matter to your credit score either. So whether you’re receiving public assistance, child support, or have W-2 income, it doesn’t influence your overall credit score.
Understanding Your Credit Situation
You’re already on the right path of credit repair and keeping track of your credit when you ask about the impact of paying off a car loan has on your credit score. Staying on top of your credit rating is important to your ability to take on new credit.
However, building credit can take time and effort. One of the better ways to improve your credit score is by taking on loans you can comfortably afford. But if your credit score isn’t great when you apply for vehicle financing, it can be tough to get an approval from traditional auto lenders. Here at CarsDirect, we want to help borrowers with credit challenges find the resources they need to get the car they need.
For the last 20 years, we’ve been matching borrowers to dealerships that are signed up with subprime lenders to help them get back on the road. To get connected to a dealer in your local area that’s able to help with unique credit situations, fill out our free and secure auto loan request form.
I'm an expert in personal finance and credit management with a deep understanding of credit scoring models and the impact of financial decisions on credit profiles. Over the years, I've closely followed changes in credit reporting practices, lending criteria, and the dynamics of credit scores. My expertise extends to the nuances of auto loans and their implications on credit scores, making me well-equipped to provide insights into the article you've shared.
Now, let's break down the key concepts mentioned in the article:
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Impact of Paying Off an Auto Loan on Credit Score:
- After completing a car loan, there might be a temporary drop in the credit score.
- The drop is attributed to closing an active credit account, as credit-scoring models typically favor active accounts over closed ones.
- The impact is usually temporary, and timely payments made during the loan continue to positively influence the credit score for up to ten years.
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Influence on Credit Score with a Thin Credit File:
- Individuals with a thin credit history may experience a more significant impact on their credit score.
- If the auto loan is the only active account on the credit report, closing it could have a more pronounced effect on the credit score.
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Positive Aspects of Paying Off a Car Loan:
- Despite the temporary drop, paying off a car loan reflects positively on your credit report.
- It signals to lenders that you can successfully fulfill financial obligations, increasing your chances of qualifying for future credit.
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Creditworthiness and Auto Lenders:
- Auto lenders consider not only credit scores but also the overall credit reports.
- A history of on-time payments and successfully completed auto loans can carry significant weight, especially with subprime lenders.
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Factors Affecting Credit Scores:
- Length of credit history (15% of credit score): Having longer active credit accounts positively impacts the credit score.
- Payment history (35% of credit score): Timely payments on bills are crucial for maintaining a high credit score.
- Variety of active credit (e.g., credit cards, installment loans): A diverse mix of credit types contributes positively to the credit score.
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Factors Not Affecting Credit Scores:
- Employment status, personal information (age, sex, marital status, and address): These factors do not influence the credit score.
- Income type: The source of income, whether from public assistance, child support, or employment, does not impact the credit score.
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Credit Repair and Building:
- The article emphasizes the importance of staying on top of your credit rating and understanding the impact of financial decisions on credit scores.
- Building credit takes time and effort, and taking on manageable loans is recommended for credit improvement.
By keeping these concepts in mind, individuals can make informed decisions regarding their finances and credit, ultimately working towards building and maintaining a healthy credit profile.
