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 – I’m glad you’re asking this question. I feel like people get misadvised about how loan repayment can affect your credit score. There’s also a big difference between “hurting” your credit and “not helping” it. Here are three things to consider in a situation like yours.

–1. How’s your credit history? This is where people get misled. The more records you have of steadily repaying lenders, the better your credit score will be. When you open a new credit card or take out a new loan, your credit tends to take a minor hit and then recovers as you make payments. This means taking more time to pay back your car loan will do a little more to beef up your credit history. Paying the entire balance now won’t hurt your score, but it will do less to help it.

–2. What’s the goal? Credit scores are fickle, silly things. Before you panic about paying off a loan too quickly, you need to ask yourself what it’s all for. Are you trying to build your credit score in hopes of buying a home or getting financing for a business? Are you working to recover from a defaulted loan or some other financial matter that left a blemish on your report? Have you just heard talk about the importance of a strong credit score and that’s your motivation? You can’t base your decision on what other people have done or some general credit-scoring formula; your specific situation needs to inform your decision.

–3. How are your finances? I almost always encourage people to pay down debt as fast as possible. The longer you take, the more you pay in interest and the less you have to invest in your future. Now, sometimes it makes sense to pay a little extra for improved credit, but there are other methods that could cost you less. You might be better served to take care of the entire car loan and then consistently use and pay down a credit card. If you don’t have an immediate need for an improved credit score, you may take the action that saves you the most money, which would probably be paying off your car loan ASAP.

Making timely payments and staying out of debt is always a good thing.

Sometimes there are ways to prolong repayment and boost your credit score a bit more, but you’re almost always better off paying quickly and saving yourself money.

TAYLOR J KOVAR
CHIEF EXECUTIVE OFFICER
CERTIFIED FINANCIAL PLANNER™