Hey Taylor – I have a car loan that I’m financially ready to pay off but wondering if it’s a smarter decision to keep it around a little longer. Will paying off the remaining $10,000 right now hurt my credit, or help? – Veronica

Hey Veronica – It’s great that you’re asking this question. There’s often a lot of confusion about how paying off loans affects credit, so it’s important to understand the difference between “hurting” your credit and just “not helping” it. Here are a few things to think about in your situation:

–1. How’s your credit history? This is an area where people sometimes get misled. The longer you’ve been paying off debt consistently, the better your credit score tends to be. When you open a new credit card or take out a loan, your credit may take a slight dip initially, but it typically recovers as you continue making payments. Paying off your car loan early won’t necessarily hurt your credit, but it might not do as much to improve it since it won’t add to your credit history length.

–2. What’s the goal? Credit scores can be tricky and depend on a lot of factors. Before making any decisions, it’s helpful to ask yourself why this matters. Are you looking to improve your credit for a mortgage or business loan? Are you recovering from a past financial issue? Or is it simply the idea of having a strong credit score that’s motivating you? The right approach will depend on your specific situation rather than just following what others have done or relying on general advice.

–3. How are your finances? In most cases, it’s advisable to pay off debt as quickly as possible to avoid paying extra interest and to have more available for future goals. There could be situations where it makes sense to extend payments to improve credit, but there are other ways to boost your credit score that might be less expensive. If improving your credit score isn’t urgent, paying off the loan sooner could be the better option financially.

Making timely payments and staying out of debt is generally a good strategy. While there may be ways to stretch out payments to boost your credit score, paying down debt quickly might help save money in the long run.

TAYLOR J KOVAR
CHIEF EXECUTIVE OFFICER
CERTIFIED FINANCIAL PLANNER™