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Lucy S
January 24, 2020
Paying off my loan early will damage my credit?
My husband and I took a loan for 3 years to buy a car last year. This year we got some extra money and we are trying to get rid of debt by paying off our loan earlier. Is this a good idea for our credit?
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Kreditiweb
Asesor financiero
January 24, 2020
Kreditiweb
Asesor financiero
January 24, 2020

Hello Lucy,
It is known that paying off a credit card earlier is a method to improve credit, so it is logical to think that the same strategy may apply when it comes to paying off a loan. Unfortunately, loans work differently than revolving accounts and the bureaus will put this action in your credit report, affecting your score and creditworthiness.
What happens when you pay off earlier a loan? The effect in your credit report is that there will be a big change in your history. Big changes tend to slightly drop credit scores. However, if you keep your finances disciplined and balanced, the drop should be temporary and it will rise again within some months. So, paying off your car loan will damage your credit score but only for a few lenght of time - if you keep being responsible when managing your other accounts.
But if you are trying to improve credit, we do not recommend paying off your car loan earlier. The reason is because open account in your credit history and being on time on their payments helps credit to rise. Why? Usually because it reinforces your trustworth with financial entities and shows how well you are able to manage your accounts. So keeping the loan will actually be more beneficial to your credit history than paying it off.
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