Many factors go into how credit scores are calculated, so whether a score will increase or decrease after a car loan is paid off due to an accident depends on individual circumstances and the status of the loan. Consumers should become aware of this information in advance to avoid any surprises when they apply for new credit to replace the car.
Balance of Existing Loan
The size of the original loan and its current balance have a direct effect on whether a credit score will increase or remain the same. If the original loan amount was for $20,000 and the balance at the time of the accident was $1,000, paying off the loan will have a negligible impact. If, however, the balance was $16,000, paying off that amount can increase a credit score significantly by reducing the consumer's total debt.
Payment History
If a consumer takes out a car loan in August and has an accident in October that causes enough damage for the insurance company to pay off the loan, that will have little impact on a credit score as the loan was outstanding for only a matter of months. On a loan with steady payments over a number of years, a payoff under that circumstance will cause the credit score to increase as it shows a responsible payment history.
Current Status of Other Loans
A loan payoff will generally have a positive impact on a consumer's credit score, regardless of the circumstances. If, however, one's credit history is checkered with multiple delinquent accounts over time, the payoff of a single loan will typically have a negligible impact. Conversely, for those with a good credit history and not many other outstanding loans, the payoff of one of them can have a direct positive impact.
Behavior Modification
Life is filled with experiences that can at first seem harmful yet have long-term benefits. After a major accident that the driver can walk from, his attitude toward life may shift to more responsible behavior, which includes working hard and doing everything necessary to keep current with bills and debts. In just a matter of months, a credit score can begin to increase under these circumstances, beginning with the payoff of the car loan and extending to all other creditors.
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