Lenders like to see a mix of both installment loans and revolving credit on your credit portfolio. So if you pay off a car loan and don't have any other installment loans, you might actually see that your credit score dropped because you now have only revolving debt.
This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio. Additionally, if the account you closed was your oldest line of credit, it could negatively impact the length of your credit history and cause a drop in your scores.
New credit applications
New credit applications—like for credit cards or auto loans—can have an impact on your credit scores. That's because a new credit application generally creates a hard credit inquiry, which can cause your credit scores to drop by a few points.
Paying off your car loan early can hurt your credit score. Any time you close a credit account, your score will fall by a few points. So, while it's normal, if you are on the edge between two categories, waiting to pay off your car loan may be a good idea if you need to maintain your score for other big purchases.
Financing a car purchase can cause the average age of your accounts to fall. This is because the length of your credit history and the age of your accounts are 15% of your FICO score. When you take out new credit, the average age of all your accounts will drop slightly. For people with many accounts, the drop is small.
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.
This happens only when you buy a car using an auto loan. This is because you've taken a huge amount of new debt. However, as you begin making on-time payments on the loan, your credit score will be back in shape.
The bottom line. Paying off a car loan early can save you money — provided the lender doesn't assess too large a prepayment penalty and you don't have other high-interest debt. Even a few extra payments can go a long way to reducing your costs.
Paying off a car loan early could hurt your credit score, especially if you have few other lines of credit. That's because your credit mix makes up 10% of your FICO score, and eliminating a car loan would reduce the diversity of loan types found in your credit report.
Lowering your credit score
Paying off your auto loan early eliminates the auto loan from your mix of credit accounts, which can cause a slight decrease in your credit score. However, any dip in your credit score should be temporary, as long as you don't have other negative factors affecting it.
If your credit score dropped by 100 points after you paid off debt, this could be due to changes in your credit utilization ratio or credit mix. It's also possible closing the account reduced the average length of your credit history, or that the drop in your credit score had nothing to do with debt payoff at all.
Generally speaking, negative information such as late or missed payments, accounts that have been sent to collection agencies, accounts not being paid as agreed, or bankruptcies stays on credit reports for approximately seven years.
To sum things up, the answer is no, it isn't bad to have a zero balance on your credit cards. In fact, having a zero balance or close-to-zero balance on your credit cards can be beneficial in many ways.
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2022, the average FICO® Score☉ in the U.S. reached 714.
Let your interest rates guide you when deciding in which order to pay down debt. That usually means sending any extra money toward credit card debt first, then personal loans, student loans, car loans and, lastly, your mortgage.
They stay away from debt.
One of the biggest myths out there is that average millionaires see debt as a tool. Not true. If they want something they can't afford, they save and pay cash for it later. Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary.
If your car is paid off, you're in a good position to trade it in. You can then use the trade-in value to lower the cost of a new or used car from the same dealership. To get the most from your trade-in, do everything you can to increase your car's value first.
No, it's not a mistake. That's because the difference likely is because of the way the interest of your loan is calculated. Basically, your balance is what you currently owe, and your payoff is what you owe plus interest that accrues from the statement date and a specific payoff date.
According to FICO data, a 30-day missed payment can drop a fair credit score anywhere from 17 to 37 points and a very good or excellent credit score to drop 63 to 83 points. But a longer, 90-day missed payment drops the same fair score 27 to 47 points and drops the excellent score as much as 113 to 133 points.
A mistake in your credit report can also do it. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed. Also, if you are certain it is for no reason, check to be sure you are not a victim of identity theft.
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.
Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.
To reach an 800 credit score, you'll want to demonstrate on-time bill payments, have a healthy mix of credit (meaning accounts other than just credit cards), use a small percentage of your available credit, and limit new credit inquiries.