Paying off a car loan is an achievement to be proud of. Not only do you finally own your car, but paying off any loan does a great service to your future buying power. The prime benefits to your credit score come not from paying off the loan itself, but from the payment history of the loan and the successful management of installment debt that your credit report will display for many years to come.
The Facts
To maximize your credit score, you should have a firm grasp of the types of debt that exist and how a good balance of each can increase your future buying power. Payments you make on a car loan are considered to be installment debt. Installment debt is a debt of a set amount that you pay in regular installments. The other most common type of debt is revolving debt, in which you make payments on debts you accrue over time. These debts do not have a set payoff date. Carrying both installment and revolving debt on your credit report makes you more of a well-rounded borrower when your report is reviewed by a lender. It also accounts for 10 percent of your score.
Payment History
Your payment history on a car loan affects your credit score to a greater degree than actually paying off the loan itself. Every time you make a payment on an installment debt that is not over 30 days late, you receive a positive notation for that payment on your credit report. Although paying off a car loan certainly cannot hurt your credit score, the payments themselves give your credit report a much greater boost since payment history accounts for 35 percent of your overall score. Only the last two years of payments you have made will be reflected in your credit history. If you paid too many of your payments 30 or 60 days late, the loan will have a negative impact on your credit score even though you have paid it off.
Reporting Period
The reporting period for your car loan is 10 years once it is paid off. Therefore, the trade line reflecting that your car loan was paid off will remain on your credit report as a positive entry for a long time. You can request that the loan be reported indefinitely, but the impact it has on your credit score will gradually lessen over time. Keep in mind that your payment history will also be reported as long as the actual loan appears on your credit report.
Benefits
It is a given that your credit score will greatly benefit from a positive trade line and positive payment history, but you will receive a far greater practical benefit from the service that paying a car loan does for your credit history. Future lenders evaluating whether to extend credit or financing to you will see that you took out a loan on a vehicle and successfully paid it off. If your credit score is iffy, this could make the difference in whether you are approved or not. In addition, by paying off a car loan you reduce the amount of overall debt that you owe. This makes it easier to get another loan in the future.
Credit History
Even though the good payment history of your car loan will have less of a positive effect on your credit score over time, the older the account gets the more it helps you build a positive past credit history. Credit history counts for 15 percent of your overall credit score. So even if you aren't getting that 35 percent boost that a good payment history grants to you anymore, you will be able to reap the benefits of your loan simply by the age of the account. Usually by the time your payment history no longer affects your score you have procured another installment loan to take the original one's place.
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