Credit Score

How Does Paying Off a Loan Affect Your Credit Score?

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With credit playing such a huge factor in your financial future, it’s no wonder we look for ways to maximize our credit scores. One common strategy for building your credit score is to pay off credit card debt. It can give your credit score a nice boost, especially if you’re carrying a large balance.

It may seem logical, then, to assume that the same strategy must apply to other types of accounts — like a car or home loan, for example. And if you follow this theory, paying a loan off early might sound like a great strategy for building your credit score. Unfortunately, you may be making yourself less credit-worthy, according to scoring models. (You can check your credit scores for free on to see where you stand.)

When it comes to credit scores, there’s a big difference between revolving accounts (credit cards) and installment loan accounts (i.e. a mortgage, student loan). Paying an installment loan off early won’t earn you any additional credit score points, and keeping them open for the life of the loan may actually be a better strategy for your credit score. Let’s take a look.

Credit Cards vs. Installment Loans

Credit cards are revolving accounts, which means you can revolve a balance from month to month as part of the terms of the agreement. And even if you pay off the balance, the account stays open. A credit card with a zero balance (or a very low balance) and a high credit limit is very good for your credit score. Installment loan accounts are very different.

An installment loan is a loan with a set number of scheduled payments spread over a pre-defined period of time. When you pay off an installment loan you’ve essentially fulfilled your part of the loan obligation — the balance is brought to $0 and the account is closed. This doesn’t mean that paying off an installment loan isn’t good for your credit score — it is. It just doesn’t have as large of an impact because the amount of debt on individual installment accounts isn’t as significant a factor in your credit score as credit utilization is.

Now that we’ve clarified the difference between credit cards and installment loans, let’s consider what happens to your credit score when you pay off an installment loan, and whether or not it’s a good idea to pay the loan off steadily over time or to pay it off early. Paying off an installment loan affects your credit score in a couple of ways:

Number of Accounts With Balances

The number of accounts with balances is one of many factors in your credit score. When you pay off a loan you’ll have one less account with a balance, which is good for your credit scores.

Types of Credit and Length of Credit History

Credit scores love to see a number of different types of credit accounts, from auto loans and home loans, to student loans and credit cards. It shows that you’re able to manage different types of credit and it’s good for your credit score. Credit scores also like long credit histories and well-aged accounts. And when you pay off a loan, the account is closed.

So how does this affect your credit score?

A common misconception is that when you close an account, the type of account and how long it was open are no longer considered in the score calculation. This is a little misleading because credit scores — the FICO score in particular — actually factor in both open and closed accounts. The confusion exists because closed accounts will eventually fall off of your credit report, but not for quite a while. Closed accounts with late payments remain on your credit report for 7 years — and if the account was in good standing and paid as agreed, it can actually remain in your credit report for up to 10 years.

Paying Off an Installment Loan Early

If you’re thinking about paying an installment loan off early, keep in mind that credit scoring models like to see open, active accounts with a solid history of on-time payments. Paying off an installment loan early will most likely not hurt your score, but leaving it open and managing it through the term of the loan shows that you can manage and maintain the account responsibly over a period of time — which is very good for your credit score.

Bottom Line

Paying off a loan and eliminating debt, especially one that you’ve been steadily paying for an extended period of time, is good for both your financial well-being and your credit score. But if you’re thinking of paying a loan off early solely for the purpose of boosting your credit score — don’t. Pay it off instead because you’re looking to save money in interest or because it’s what’s best for your financial situation.

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  • Credit Experts

    Siya —
    You are wise to be looking at your scores now, because your scores will affect the interest rate you are offered. This blog post may be useful to you in deciding how and when to pay off those loans: The Right Way to Pay Off Debt to Get a Mortgage.

  • Gerri Detweiler

    Lily – It is worth a try. Why not?

  • Gerri Detweiler

    It’s perfectly fine to pay off your student loans. You don’t have to carry debt to have a good score, and they don’t just disappear from your credit reports when you pay them off.

    It would be a good idea to check your credit score, You can do that using’s free Credit Report Card which will tell you what factors are affecting your score.

  • Gerri Detweiler

    Don’t worry too much lulu. That reference won’t disappear from your credit reports when it is paid off. However, it is good for you to have more than one account reporting. Do you have a credit card? If not, consider getting a secured credit card to build another credit reference.

  • Credit Experts

    I’m afraid we’re uncertain about how credit scores work in the UK. As far as an appeal goes, it never hurts to ask. had a post about overturning credit card rejections. Though the particulars in your case will be different, the general advice may be useful: The Art of Overturning a Credit Card Rejection.

  • Toni

    My credit score dropped 100 points because I had two items on my report in dispute..I asked them to take it out of dispute and that’s how my score dropped so I decided to pay the items off in full.. One was closed credit card account and the other was a collection last week my report was updated and now I’m in the high 700’s and mortgage your score will sky rocket when collection accounts are paid in full..

    • creditschmedit

      Noooooo! a paid-off negative account is still a negative account, there’s no boost to your credit by paying it. Also, it will remain on your credit report for 7 years from the day you paid it…. so you just kept that baddie on your record even longer while receiving no tangible benefit.

      • Gerri Detweiler

        You are correct that a negative paid off item may still remain on your credit reports but it’s not 7 years from the date you paid it. It’s 7 years from when it was late, or in the case of a collection account, 7 years plus 180 days from the date you fell behind with the original creditor.

    • Marc Roth

      I would not recommend paying off a collection debt unless you get, in writing, a promise from the collection agency that they will remove the record from your report within 30 days of the account being paid in full. A paid collection debt will still remain on your report with almost as much impact as a non-paid one.

      • Gerri Detweiler

        Yes, paid collections do remain on credit reports and can impact your scores. But not all collectors will agree to “pay for removal” deals, unfortunately. Still, you are right that it’s worth trying. We wrote about that topic here:
        Can You Get a Debt Collection Account Off Your Credit Report?

  • Alinger95

    Just got approved for a 20,000 car loan and they pulled a 708 for my credit score. To have that high of a credit score at only 18….. Great feeling!

    • Credit Experts

      Glad to hear it — and good for you!


    Ugh. The very idea that credit bureaus would use a system that actually disincentives paying off installment loans early is absolutely crazy. From the point of view of overall personal financial well-being, paying off any loan early will save on total interest paid over the life of a loan and that is a good thing. Any system which encourges consumers to do otherwise is, frankly, extremely unethical.

    • Charlie Gorichanaz

      Though this system does encourage me to save the money I would otherwise put toward student loans and (possibly invest it in a possibly higher yielding account and) use it to increase the size of my down payment on a house, lowering my mortgage rate while making my bid more attractive and potentially lowering my overall interest payments in the long term.

  • Credit Experts

    A “hard” credit inquiry (as when you apply for a credit card or loan) causes a small, temporary dip in credit scores. It shouldn’t hurt long term. You and your husband can get your credit scores for free with a account. It’s also a good idea to check your free annual credit reports to make sure that information is accurate. When you’re ready to apply for a car loan to replace the one you have, find out what scores are acceptable for what interest rates, and be as close to certain as you can that you’ll be approved before you apply.

  • Seekingthetruth2014

    Does this lady get kick backs from the banks and credit card companies? If you can pay off your loan and save money on interest charges do it. Take the money that you would normally spend on the credit card and invest it. This talk about keeping loans open just to have a high credit score is really misleading. This is coming from someone with a credit score of 814, it does not matter it is nothing but a number, a scam put into place for banks to make money. I pay everything in cash now, if you can’t afford it, don’t buy it!!

  • diavi242

    I highly recommend getting a Walmart card. Seriously, they approve people easily, and they constantly increase your limit as you pay your bill on time. It’s an excellent place for someone new to build their credit.

  • diavi242

    I bought a new truck in 2011 and got 3.5% interest. Since then, I got a 4K limit Visa card…and when I went to buy a 65K car…was declined most places and offered a 10% APR from one lender. I turned it down and walked away. However, the only thing that’s changed since my original truck purchase, is that I have a vacation on the Visa card. I make plenty of money, so I know income isn’t the issue. I sold the truck and made a $3500 profit. I intend to pay down my Visa to $500 balance, and pay off some other cards…but keep them open. Do you think this may boost my score back up to the 720 it was a couple of months ago?

    • Credit Experts

      We don’t know how quickly your score will come back up (a number of factors go into your score), but you are right that the amount charged on your Visa card may have pushed your score down. Part of your score is determined by how much of your available credit you are using. Anything higher than 30% can hurt your score (and it’s better to keep the balance under 10%). With a $4,000 limit, 10% is just $400.

      Here’s how to monitor your credit score for free and also get an analysis of the factors that make it what it is and an action plan to improve it.

      Here’s are a couple of resources that might be useful to you:
      Credit Score Updates: How Long Will It Take?
      How to Rebuild Credit

  • John

    My credit score is 798. If I pay off a 5k loan early that will save about $800 in interest, but would that add very little to my score? Under what circumstances would a score ever drop from a very early loan paydown?

    • Credit Experts

      John —
      A score that high is well within the excellent range. Paying off your loan early may or may not affect your scores (there are many variables involved). Scores fluctuate, so we wouldn’t read too much into small changes. We would advise doing what you’ve been doing — paying on time and keeping card balances low. And don’t sweat a few points’ difference in score. We wrote about that here: Why a Perfect Credit Score Doesn’t Matter.

      • Summer

        I am also looking to buy a house and like a person earlier in the thread want to pay off an installment payment so that I can avoid the interest and have more usable income. Will it hurt my score?

        • Credit Experts

          It could conceivably hurt your credit mix (one of five factors that affect your credit score). However, credit mix accounts for only 10% of your score, so keep that in mind. Other options might be to pay off your loan and also take out a much smaller installment loan, so you have both the benefit of an installment loan and more available income. It’s also smart to check your credit reports and dispute any inaccuracies. Here’s how to get your free annual credit reports. You can get your free credit score from, as well as see how your credit is affected by the five factors mentioned earlier.

        • Guest123

          Pay down the loan so you only have 2 payments remaining when you apply. You will still get the benefit of the credit mix in your credit score and most lenders will not count a debt in your DTI ratio if it will be paid off in 2 months.

  • HomeOwner Bound

    I am considering paying off an installment loan so that a potential mortgage lender will see that my monthly expenses have decreased about $440 a month. I am hoping that this will also increase the amount of house I can reasonably afford to buy and still keep my debt at or below %40 of my income. Will paying off this account cause my score to go down? I guess I could use the same amount to buy down the rate on the house, but I would rather pay off the car loan and have that money go back into my budget so that taking on a mortgage is that much more affordable for me each month. What would you suggest?

    • Gerri Detweiler

      It’s possible your score could drop somewhat if that loan is your only active installment account.

  • Jessica Maurer

    I have a question about this because I have a personal loan of $1,000 from my bank. This is the second time I have gotten a loan amount of this size from this same bank. The first one was from a few years ago. Both times when I have gotten declination of credit letters or increase of APR letters one of the reasons cited is “lack of recent installment loan history.” I don’t get it. This is a current loan, I just made the 2nd payment on it and and yesterday got this increase in APR letter from the same bank that issued the loan. How could they not know that I have a current installment loan….with THEM?

  • Shan

    I have a car loan but I have the money to pay it off. My credit is about a 630 and I want to raise it so would it be wise to pay on it about a year and a half

    • Kali Geldis

      Hi Shan —

      If your primary goal is to raise your credit score, paying off the loan over time will be your best bet. However, if you have the money to pay off the loan in its entirety now, you’ll save money in interest by doing so. One saves you money, the other fosters a healthier credit score. It’s a matter of personal preference and your own financial goals. A good credit score can save you money in the long run, but if you aren’t planning to apply for any new credit in the next few years, paying off the loan to avoid extra interest charges may be the smarter move.

  • Dave

    If i opened an account and it was in collections and now i got it current, will it hurt me too just pay the whole thing off . its with an electronic store. Or should i keep the accounts open and continue to pay on time

    • Gerri Detweiler

      Is it now reported as an open revolving account or as a collection account? If the latter, it doesn’t matter. If it’s an open revolving account then the question is do you have any other accounts? If not then paying this off could leave you with no active open accounts which could hurt your scores. But if you have others, then it’s probably not such an issue. It really depends on everything on your reports and it’s hard to say with such limited information.

  • IM

    If I take a loan out for $10,000 and pay if off in 3 months will this effect my credit score negatively?

    • Gerri Detweiler

      A new account can drop your scores a bit in the short run. I can’t guarantee it but the effect usually levels off once it is paid on time for a few months.

  • Gerri Detweiler

    Kayla – I am not sure I understand. What is being reported that is bringing down your credit scores?

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