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.
FAQs
Whenever you make a major change to your credit history—including paying off a loan—your credit score may drop slightly. If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months.
How much does credit score go up after paying off a car? ›
Whenever you make a major change to your credit history—including paying off a loan—your credit score may drop slightly. If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months.
Why did my credit score drop 100 points after paying off my car? ›
Your credit score may drop after you pay off debt because the credit scoring system factors in things like your average account age and credit mix.
How long does it take for your credit score to go back up after a car loan? ›
There's no set time frame for how long it takes a car loan to improve your credit score. After buying a car, you can expect to see your score improve after making monthly payments on time and paying down your loan balance.
How much does your credit score go up when you pay off a credit card? ›
If you're close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt. Yes, even if you pay off the cards entirely.
What happens when you finish paying off your car? ›
Once you've made your final payment, you must get the title from your lender to prove you legally own the car. In some states, getting your title is an automatic process after you pay off your loan. In others, you may have to submit paperwork to the Department of Motor Vehicles.
Is it smart to pay off a car loan early? ›
While paying off your car loan early is typically the best move to reduce your debt and save money, it is not for everyone. If you can't afford to make a larger down payment or pay extra each month it may not be a good idea. Refinancing a car loan can be a better option in this case.
How to increase credit score by 100 points in 30 days? ›
Steps you can take to raise your credit score quickly include:
- Lower your credit utilization rate.
- Ask for late payment forgiveness.
- Dispute inaccurate information on your credit reports.
- Add utility and phone payments to your credit report.
- Check and understand your credit score.
- The bottom line about building credit fast.
It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up.
How much will my credit score go up if I pay off a collection? ›
VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore.
When you pay off a credit account, the lender will update their records and report that update to Experian. Lenders typically report the account at the end of its billing cycle, so it could be as long as 30 to 45 days from the time you pay the account off until you see the change on your credit report.
Will a car payment improve my credit? ›
Although making on-time monthly payments will eventually lead to a higher credit score, most car buyers will first experience a temporary reduction in their credit score. In short, buying a car can be a good way to build your credit score over the life of the loan, but it's more of a long-term credit building strategy.
Why does paying off my car lower my credit score? ›
It might reduce the types, or 'mix,' of credit you have
But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip — even though you did exactly what you agreed to do by paying off the loan.
How much will my credit score go up if I pay off my car? ›
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.
Is 650 a good credit score? ›
As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score.
Is it bad to have a lot of credit cards with zero balance? ›
However, multiple accounts may be difficult to track, resulting in missed payments that lower your credit score. You must decide what you can manage and what will make you appear most desirable. Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it.
Why did my credit score drop 40 points after paying off debt? ›
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
How long does a paid off car loan stay on a credit report? ›
At Experian, for example, a paid off auto loan can remain on your credit report for up to 10 years after the final payment so long as there is no negative payment history to report. If the account had late payments before it was paid off, those negative marks could remain on your credit report for up to 7 years.
Does paying on a car build credit? ›
Although making on-time monthly payments will eventually lead to a higher credit score, most car buyers will first experience a temporary reduction in their credit score. In short, buying a car can be a good way to build your credit score over the life of the loan, but it's more of a long-term credit building strategy.
How many car payments does it take to raise your credit score? ›
When you make a timely payment to your auto loan each month, you'll see a boost in your score at key milestones like six months, one year, and eighteen months. Making your payments on time does the extra chore of paying down your installment debt as well.
