Should I pay off my auto loan now, or is it better for my credit score to make monthly payments?
You have a credit card that you pay off every month so that will help your credit score more than anything because your history lists the amount of credit available to you but you have shown restraint and don’t carry balances. So your credit to debt ratio is good. It is always better to be out of debt no matter how it reflects on your credit score. Carrying debt only increases your worry quotient. If you have the money to pay off the car, by all means, pay it off. It saves you interest and gives you a debt free life. After you pay it off take those 40 payments you would have been making and sock them away in a savings account or CD so you are earning interest instead of paying it. Interest on savings isn’t so high right now, but you will still have money in the bank. Or better yet, open a Roth IRA and put the savings in it.
Being debt-free is wonderful but, unfortunately, doesn’t do much for your credit score. Paying off your credit cards every month is the absolute best thing you could do for your own financial well-being but does not establish a payment history, which is actually what your credit report IS. That said, if I had to choose between paying 17.99% interest on a credit card and building my score up a little, or paying the sucker off every month and keeping that 17.99% in my own pocket instead, I choose the latter option. I’d rather have the money than a better credit score, BUT I can make that choice (for now anyway!) because my score is just fine. As far as your car goes….you have a 14 month history of payments (which is good) but if you were to pull your credit report and read the section marked “things that negatively affect your credit rating” you’ll see a sentence that reads “credit too new to establish accurate history” (or some variation of the same BS). Anything under 2 years old is
I believe that as long as you have a history of making on time payments you would be better off paying off the car loan, the reason being outstanding debt to income is almost as important as payment history in determining your credit score. You would then have much less debt and a payment history, much better than a history alone. Your situation might be different depending on the actual amounts involved. If you have a zero percent or low interest car loan subsidized by a car company and you could get a higher return on your money than the interest then keeping the car loan might be the smarter alternative.
Paying off installment loans early really doesn’t boost your score the way paying off credit card balances will. For a car loan to count in your score, you need at least 12 months of payments — 18 is better. I suggest you wait 4 months till you make that 18th payment, then payoff the balance. That way you take full advantage of the installment loan building your credit and can save all that extra interest. The smart thing would be to open a special savings account and deposit the car payment amount each month. By the time you’re ready to buy your next vehicle, you’ll have cash in hand.
You never know what’s going to come up in life where you might need some of that $9,000. I really don’t know what your financial situation is, but if you’re trying to build a good credit score, I would ON TIME pay two payments at once each month. You’re building credit, but you’re paying two payments which looks good and also cuts you down to 20 more payments. When you get down to only having around six payments or less, just pay it off if you’re still able. The double payment thing saves you on interest and the paying off early off course does as well, while you’ve built some credit.
