Does Paying Off a Loan Early Hurt Your Credit Score?

Paying off debt to build credit is a pretty well-known strategy. It can help improve your credit score, especially if you’re carrying a large balance on your credit cards. So if you have other types of debt, like car or home loans, paying off those accounts might seem like a step in the right direction.

But here’s the thing—having a mix of accounts in your credit history is goodfor your credit score. You’ll actually want to have a good mix of revolving and installment loans. So does paying off a loan early hurt credit?

Does Your Credit Score Drop When You Pay Off Debt?

Unfortunately, paying off non-credit card debt early might make you less credit-worthy according to scoring models. When it comes to credit scores, there’s a big difference between revolving accounts (such as credit cards) and installment loan accounts (such as a mortgage or student loan).

Paying an installment loan off early won’t improve your credit score. It won’t necessarily lower your score, either. But keeping an installment loan open for the life of the loan could help maintain your credit score.

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. 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 good for your credit score because it helps lead to a low credit utilization rate.

Installment loan accounts affect your credit score differently. An installment loan has a set number of scheduled payments spread over a predetermined 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.

Does Paying Off a Loan Build Credit?

Paying off an installment loan as agreed over time does build credit. In part, that’s because 35% of your credit score is based on timely payments. And if you make timely payments for five or more years on an installment loan, that’s a lot of goodwill for your credit score.

Types of Credit and Length of Credit History

Credit scores are typically better when a consumer has had different types of credit accounts. It shows that you’re able to manage different types of credit. Your credit mix actually accounts for 10% of your credit score.

The age of your credit impacts your credit score. It accounts for around 15% of your score. Eventually, closed accounts fall off your credit score, which can reduce the age of your overall credit—and subsequently, your credit score.

Does Paying Off a Loan Early Hurt Credit?

If you’re thinking about paying off an installment loan early, take some time to think about it. Could you keep it open? It could be an active account with a solid history of on-time payments. Keeping it open and managed shows creditors that you can maintain the account responsibly over a period of time.

Consider other possible consequences of paying off a loan early. Before you pay off your loan, check your loan agreement for any prepayment penalties. Prepayment penalties are fees that are owed if you pay off a loan before the term ends. They’re a way for the lender to regain some of the interest they would lose if the account was paid off early.

Paying Off a Mortgage Loan Early

Sometimes paying off your mortgage loan too early can cost you money. Here are steps you can take to lighten those expenses:

  • When paying extra toward a mortgage each month, specify that the extra funds should be applied toward your principal balance and not the interest.
  • Check with the mortgage lender about prepayment penalties. These penalties can be a percentage of the mortgage loan amount or equal to a set number of monthly interest payments you would have made.
  • To help protect your future credit score, always make sure you have money set aside for emergencies and only pay extra if you can afford to do so.

Paying Off an Auto Loan Early

If you’re looking to pay your auto loan off early, there are several ways you can do so. When paying your loan each month, it might be beneficial to add an extra $50 or so to your payment amount. That lets you pay off the loan in fewer months and pay less in interest over the loan term. If possible, specify that the extra amount is to pay principal and not interest.

Another option is to make a single, large extra payment each year. Mark the payment as an extra payment toward principle. Do not skip another auto payment because you made this one, as your lender might consider you late if you do.

Repaying and Paying Off Student Loans

There are no prepayment penalties on student loans. If you choose to pay student loans off early, there should be no negative effect on your credit score or standing. However, leaving a student loan open and paying monthly per the terms will show lenders that you’re responsible and able to successfully manage monthly payments and help you improve your credit score.

The Bottom Line: Will Paying Off a Loan Improve Credit?

Paying off a loan and eliminating debt, especially one that you’ve been steadily paying down 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 off a loan early solely for the purpose of boosting your credit score, do some homework first to ensure it will actually help. If paying a loan off early won’t help your score, consider doing so only if your goal is to save money on interest payments or because it’s what’s best for your financial situation.

Source: credit.com

Dear Penny: I’ll Never Marry My Boyfriend, So Can I Hide My Debt?

Dear Penny,
One benefit of telling your boyfriend is that opening up can be a relief. Keeping a bad situation secret only compounds the stress. When you look at something through the lens of shame, it often becomes so much worse than it actually is in your mind.
Do I have to tell him about my debt when we have said we don’t want to remarry? I am embarrassed about the debt.
As long as your debt isn’t impacting him, you shouldn’t feel guilty for not telling him. But I wonder if you’d feel better if you told him.
If you haven’t told anyone about this lingering debt, consider telling a trusted friend or family member first. Doing so could help you gauge your boyfriend’s reaction. You may also discover that talking about this isn’t as scary as you’ve imagined.

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I won’t try to pretend that learning your debt is a deal-breaker for him wouldn’t be incredibly painful. I certainly understand why the easiest thing to do is not to talk about this when you’re happy and in love. Still, I think it’s important to know whether he cares more about you or your net worth.
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-L.
Your boyfriend’s reaction isn’t the only thing to consider when you make this decision. Be honest with yourself: By keeping this secret, are you spending more money because you’re trying to pretend like you don’t have any obligations? When you’re not upfront about your financial situation, you often wind up with a lifestyle you can’t afford. You say yes to the vacations and restaurants that are out of your budget because you don’t want anyone to suspect that you’re struggling.
Whatever you choose, I hope you can stop feeling embarrassed about your debt. It’s not a character flaw. Life can throw a lot of unexpected hurdles at you. Sometimes your battle wounds come in the form of debt. Hopefully after seven decades in the world, your boyfriend is wise enough to recognize that.
What I’m hoping is that you’re underestimating your boyfriend. You say he “always” talks about being debt-free aside from his mortgage. It may be that he’s simply more open to discussing money than you, so it feels like he’s constantly talking about his lack of debt.
You aren’t obligated to disclose every single aspect of your life and finances to your boyfriend. Of course you’d need to tell him you have debt if you were talking about marrying or moving in together. That’s not the case here.
Regardless of how you proceed with your boyfriend, I hope you recognize that not talking about this debt isn’t going to make it disappear. You need a plan for how to conquer this debt, whether that involves paying it off as quickly as possible or keeping the monthly payments as manageable as possible. If you haven’t done so, consider making an appointment with a financial planner or counselor to make sure your plan is solid. You may feel better about telling your boyfriend you have debt if you can also talk with confidence about how you’re handling it.
My boyfriend and I are 71 and 72. He’s been divorced three times, and I’ve been widowed twice. We both have our own homes and good incomes. 
Dear L.,
Context matters a lot here, too. Is he bringing it up because he’s proud of the accomplishment? Or because he’s excited about all the things he can do because his expenses are low? That’s a lot different than if he’s the type of person who thinks that just because he’s debt-free, anyone else who has debt is irresponsible.
Ready to stop worrying about money?
I have no idea if this is happening here. You don’t say how much debt you have or whether it’s manageable. But if this debt eats up a significant part of your income and you’re a couple who tends to split things relatively equally when you go out on dates or travel together, it’s something you need to seriously consider.

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Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

Car Repossession: What to Do Before, During and After

If you miss even one payment, and your lender technically can repossess your wheels.
But will a lender really take your car if you’re late on this month’s payment? It’s unlikely, according to Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C.
Your credit score will take a hit — a big one.
The best way for the lender to get that money is to sell the car, often through an auction. So you’ll have to act fast if you want your car back.

Car Repossession: What Can You Do Before, During and After?

After taking possession of your car, the lender begins the process for recouping the money you still owe on the car loan, plus any fees incurred — think towing, storage of the vehicle, re-keying the car and legal fees.
Although losing your vehicle and the repossession expenses may be upsetting or even devastating, the lasting financial consequences of a repossession could hurt even more.
“Act very quickly,” she said. “Because at that point, the loan has not been sent out to collections.” If you can’t reach a deal with your lender, you should prepare to have the car repossessed by removing all personal items from your car, as repo companies can take your car at any time — whether the car is parked in front of your home, at work or at the grocery store.
Facing bankruptcy? You may be able to hold onto your car. Consult your bankruptcy attorney about whether your filing status allows you to retain property, including your vehicle.

What to Do if You Can’t Make Your Auto Loan Payments

Car repossession can remain on your credit report for seven years — making it more difficult to qualify for another loan, increasing the interest rate you’re charged on other loans and even potentially affecting your ability to get a job or a place to live.
If you know that you’re already in danger of having the car repossessed, there is a way to mitigate the financial impact: voluntary repossession.

Pro Tip
It’s to your lender’s financial benefit to work with you rather than spending the money to repossess your car, but they can’t help unless they know what you’re facing and what you’re able to pay, according to McClary.

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  • Ask about forbearance programs. Call your lender to explain why you’re unable to make your monthly payment and request a forbearance. Be prepared to share details and documentation if it’s due to a job loss, illness or change in family status. Your lender may offer a delay in your payment or a revised schedule of payments, but you’ll still be responsible for the loan — and oftentimes the accruing interest. But if the situation is temporary, a forbearance could let you delay payments until you’re back on your financial feet.
  • Downsize to a cheaper car. If you can trade in your current set of wheels for a more economical version — think smaller and older — you could roll your old loan into a new, more manageable one. Be sure to get a pre-approved auto loan to give yourself some leverage when negotiating the interest rate.
  • Sell your car. If you don’t need the vehicle, you could potentially sell it for enough money to pay off the loan balance, which would free you from monthly payments entirely.
  • Refinance. This option may be the most difficult to successfully pursue for many borrowers, as lenders have tightened their standards due to the current economic situation. But if you have an excellent credit history and you have stable employment, you could qualify for refinancing your loan at a lower interest rate, thus reducing your monthly payment.

If you have the cash, paying off what you owe to make your loan current again may be the ideal solution, but there are other options if you’re struggling to make payments:
The repo company cannot “breach the peace” — aka break the law. If the collector uses physical force or destroys your property, you can potentially file a lawsuit. Keep notes of all interactions.

What to Do if Your Car Is in Danger of Being Repossessed

Depending on where you are in the car repossession process, you do have options for keeping your car — and more of your money.
If you don’t have enough money to cover the missing payments, you should explain your situation and offer at least a partial amount — in cash — as a show of good faith, according to Davis.

  1. Pay the past-due amount, plus any late fees and repossession costs. You get your car back and resume paying your car loan.
  2. Don’t destroy your car to get revenge. Your lender may not take the vehicle if it’s deemed worthless, but then they can’t sell the car to pay off your loan. You’ll end up owing more.

The result is most devastating for subprime borrowers — those with credit scores under 600. Serious delinquency levels within that group rose about 22% between the fourth quarters of 2019 and 2020.
An auto loan contract states if you fail to make a payment — and the process can legally start after one missed payment — the lender has the right to take back your car.
You have a few options — some are less costly than others, but none are particularly easy:

Pro Tip
Source: thepennyhoarder.com

If the amount is too large to settle, though, the lender will contact you and, depending on the state where you live, can pursue the deficiency balance through collections.
That’s where you drive the car to your lending institution and hand over the keys. Doing so voluntarily still counts as a type of repossession, but you’ll avoid towing costs and other expenses the repossession company charges to locate your car.
The lender will sell the car, typically at auction, to get some of its money back. It’s technically possible for you to buy back your car by bidding on it at auction, but you’ll still be responsible for paying your old loan, plus all those fees.
How can your bank, credit union or leasing company possibly have the right to take back your vehicle? Read your loan agreement.
“I would put it on that scale of somewhere around bankruptcy or foreclosure,” McClary said. “You can climb out of this hole, but it will take some time.”
By contacting your lender early in the process, you’ll not only create a record of your attempts to satisfy the loan, you’ll avoid additional fees that the lender may incur by hiring a third party to collect your vehicle.

Pro Tip
If you’re unable to come up with the money to get your car back, the lender will use the proceeds from the sale to pay off what you owe. If the sale price is less than your loan balance plus any fees, the difference is called the deficiency balance. That’s the amount you’ll be responsible for paying.

“The difference between the two in terms of impact on your credit score is slight,” McClary said. “But if you’re thinking about trying to restore your good credit and how much effort it’s going to take, every little bit helps.”
If you haven’t been paying your auto loan, there’s a good chance you haven’t been paying your auto insurance either, and some lenders require insurance as a condition of your loan. Even if you haven’t missed enough payments to have your car repossessed, the lender could potentially take your vehicle due to inadequate auto insurance.

What to Do if Your Car Has Been Repossessed

“Communication is one of the best tools that you have in the earliest stages when you’re late making car payments,” he said. “The fewer unanswered questions that your lender has, the more likely they are to try to cooperate.”
But a car repossession isn’t the end of the world, so long as you commit to making smart money-management moves that raise your credit score and help get yourself back on the road to recovery.
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Although lenders may have the legal right to start the repossession process the day after a missed payment, most give customers a grace period of at least 10 days when they won’t even charge a late fee. If you’re in this situation, the time to act is now.

  1. Reinstate your loan.

    Ready to stop worrying about money?

  2. Redeem your loan.

    If you’ve missed even one payment, here’s why now is the time to dig up the loan agreement you signed when you originally bought or leased the car:

  3. Give up your car, then buy it back.

    If you had enough money to pay off your loan in the first place, you probably should have done this before the repo company took your car. But if you pay off the loan and all fees, you get your car back free and clear of any loans.

And although a voluntary repossession will affect your credit score, your lender will technically report it to the credit reporting agencies as a “voluntary surrender” rather than an involuntary “repossession” — which could help as you recover.

Pro Tip
Avoid a Friday evening car repossession if possible: Repo companies are often closed over the weekend, but they’ll charge you storage fees for Saturday and Sunday.

So what can you do if you know you’re in danger of having your car repossessed — or if it’s already been repossessed? Check out this guide to help you before, during and after car repossession to help you and your finances survive this bumpy ride.
“They could take you to court over the money you owe, and try to garnish your wages,” he said. “There are all kinds of ways that they could legally pursue repayment of that debt, beyond the sale of the vehicle.”
“The efforts to repossess your car typically start after you’ve missed a couple of consecutive payments,” he said. “If you miss two payments, you should start getting a little bit concerned, and if you miss three payments and your car is still sitting in your driveway, you may not have much more time.”

The Long-term Effects of Car Repossession

Find your contract and contact your lender’s loss mitigation or collections department to explain your situation, advised Jenelle Davis, who worked in the credit union industry for seven years.
Because the repossession process is outlined in your loan agreement, your lender legally can repossess your car without notice or a court order. But most lenders will call, email or send notices (or all of the above) outlining the consequences if you begin missing car payments.
“There’s no shame in saying… ‘I have a couple hundred bucks in my budget, can I throw this on the loan so that I don’t get it repoed?’” she said.
Your loan agreement should state how many payments you can miss before the lender can repossess your car.
The effects of the coronavirus pandemic have been especially burdensome on auto loans borrowers. Unlike student loans and mortgages, there are no government-backed relief programs to cover a monthly auto payment.
And if you think hiding the car will keep the repo company at bay, you’re likely only adding to the fees you’ll end up having to pay as the company expends resources — including paying someone to follow you — to locate the vehicle.

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The first rule of preventing a vehicle repossession: Communicate early and often.

Save Money and Time With a Loan From LendingClub

Interest rates with LendingClub start at 8.05% — way better than the 20% or more your credit card is charging you — and many people may actually improve their credit scores when they take out a personal loan and make their payments on time each month. These lower rates can save you an average of ,000 in interest payments and help you pay off your debt faster.
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There’s another option, though. If you need to borrow up to ,000, a website called Fiona can help you get a loan through a company called LendingClub. You can save an average of ,000 on interest payments1, plus, you could get your money in only a few days — talk about relief!

How to Borrow up to $40,000 and Pay Off Debt Faster

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Getting started is simple. The application process only takes a few minutes, and you’ll see your loan offers immediately. Once you choose your loan, you could see your money in just a few days.
1 On average, personal loans from LendingClub Bank are projected to be offered at an APR of 15.99% (based on loan approval amounts in aggregate) with an origination fee of 5.30% and a principal amount of ,411 for loans with term lengths of 36 months, based on current credit criteria and an analysis of historical borrower data between September 2020 and October 2020. For credit card purchases made in October 2020, the average APR was 20.23%, according to publicly available information published by TheBalance.com. If you pay off a credit card balance of ,700 with an APR of 20.23% over 36 equal monthly payments, you will pay ,345 in total finance charges. If you obtain a loan with a term of 36 months and an amount financed of ,700 (principal amount of ,411 with an origination fee of 1) at 15.99% APR, you will pay ,372 in total finance charges over the term of the loan, a savings of 3 as compared to the average credit card.
If you have a credit score above 600 and need a loan, let Fiona find your offers in only a couple of minutes. You can get approved and see your money in just a few days.
Fiona will also show you additional offers from other lenders — because comparing your quotes can help you save even more money in the long run.
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It costs nothing to apply, and it won’t affect your credit score, either. And by the way, your information is totally safe — the website uses higher encryption security than many banks.