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.
Any credit score drop is likely to be minimal
As soon as the account was updated to "paid loan" on my credit, my FICO® Score dropped by 4-6 points, depending on which of the three credit bureaus I checked. To be clear, every situation is different.
In some cases, paying off your car loan early can negatively affect your credit score. Paying off your car loan early can hurt your credit because open positive accounts have a greater impact on your credit score than closed accounts—but there are other factors to consider too.
If you pay off your only active installment loan, it is considered a closed credit account. Having no active installment loans or having only active installment loans with relatively little amounts paid off on those loans can result in a score drop.
Lenders like to see a healthy mix of revolving accounts, like credit cards, and installment accounts, like auto loans. If you pay off a car loan early and it's your only installment account, your credit score could take a hit. And if you have very few credit accounts, the hit to your score could be even greater.
Paying off a car loan early can save you money — provided there aren't added fees and you don't have other debt. Even a few extra payments can go a long way to reducing your costs. Keep your financial situation, monthly goals and the cost of the debt in mind and do your research to determine the best strategy for you.
Once your loan is fully paid, the lien on your car title is lifted, and the title can be released to you. At this point, the legal ownership of the car transfers from your lender to you.
Paying off a loan might not immediately improve your credit score; in fact, your score could drop or stay the same. A score drop could happen if the loan you paid off was the only loan on your credit report. That limits your credit mix, which accounts for 10% of your FICO® Score☉ .
When you pay off a loan, the account will be updated to show that it has been paid in full. Your credit report will retain the account's payment history, however. If there were late payments on the account, they'll remain on your credit report for seven years, at which time they will be automatically removed.
Paying off your loan sooner means it will eventually free up your monthly cash for other expenses when the loan is paid off. It also lowers your car insurance payments, so you can use the savings to stash away for a rainy day, pay off other debt or invest.
Experts say three to six months' worth of take-home pay is the ideal, but save as much as makes you comfortable. If you're a freelancer or small business owner, for example, you might prefer to have six months to a year's worth of monthly expenses stashed away.
This is why Edmunds recommends a 60-month auto loan if you can manage it. A longer loan may have a more palatable monthly payment, but it comes with a number of drawbacks, as we'll discuss later. The trend is actually worse for used car loans, where just over 80% of used car loan terms were over 60 months.
A 750 credit score generally falls into the “excellent” range, which shows lenders that you're a very dependable borrower. People with credit scores within this range tend to qualify for loans and secure the best mortgage rates. A 750 credit score could help you: Qualify for a mortgage.
About 21.8% of America has a credit score higher than 800 points. If you have a credit score of 800, it likely means that you manage debt well and never miss a loan payment. This makes you an ideal borrower and gives you access to more offers and lower interest rates.
FICO® score ranges vary — they can range from 300 to 850 or 250 to 900, depending on the scoring model — but higher scores can indicate that you may be less risky to lenders.
Every payment you make towards your loan is reported back to each credit bureau. 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.
A FICO score of 650 is considered fair—better than poor, but less than good. It falls below the national average FICO® Score of 710, and solidly within the fair score range of 580 to 669.
Depending on where you're starting from, It can take several years or more to build an 800 credit score. You need to have a few years of only positive payment history and a good mix of credit accounts showing you have experience managing different types of credit cards and loans.
If you have been using credit for only six months or a year, it's unrealistic to expect a score in the high 700s. Still, it is possible to establish excellent credit — a score of 800 or higher, for example — in your 20s.
A FICO® Score of 730 falls within a span of scores, from 670 to 739, that are categorized as Good. The average U.S. FICO® Score, 711, falls within the Good range.
700 is a good score — and with a little effort, you should be able to find a mortgage lender who will give you a competitive rate and get you into the home you want.
Having a credit score over 800 isn't just good. According to the FICO credit scoring system, it's exceptional. Although both the FICO and VantageScore credit scoring systems go all the way up to 850, you actually don't need to hit 850 to reap the same benefits as those with a perfect credit score.