Does paying off a car loan increase or reduce a persons credit score?

Question

I know that closing credit card accounts reduces the number of open credit lines, and paying off a car loan would also reduce the number of credit lines. I have had the car loan for over 3 years, it is at 9%, but I'm not too worried about the interest cost. I want to reduce debt, but I also need to increase my credit score.

After a rough period (I had two houses and other problems), I am repairing my credit. I recently sold my old house (had the mortgage for 9 years after refinance). And I settled my second mortgage.

I have a house (and mortgage, 7 years, plan to stay for at least 2 years), I have a single credit card, and the car loan. I plan to get a (second) credit card soon.

The ideal credit mix is a mortgage, an installment loan, and 2-4 credit cards (no student loan). But it is not clear whether the car loan needs to be open for the best credit score.

These questions touch upon my question, but do not clearly answer it.

• This question says accounts lasting over a year are kept for 7 years.
• This question says you should payoff car loans because cars depreciate.
• This question says less debt gives higher score.
• This question talks about a recent car loan (not applicable).

Answer 1

It sounds like you're trying to optimize a number that you should care about only a handful of times in your life. Credit scores don't mean much in real life unless you plan on using a lot of credit/debt and don't have the assets to back it up (like getting a new mortgage with less than 20% down or a loan for a car that's too expensive for you).

For everything except credit cards paying it off is better. For credit cards it gets much more complicated. The main things that are taken into account are:

• Debt to credit limit ratio (Ideal is 20%>= Current Debt > 0%)
• Average age of credit accounts
• Total credit limit over all cards (only for calculating the debt utilization ratio)
• Number of cards
• Of course paying on time always
• Number of hard inquiries

If you want to learn more checkout Credit Karma, they break it down in a good amount of detail what your score is and why it is where it is.

Answer 2

Loan paid off in full has a positive value for your credit score. It shows that you were able to meet your obligations and pay off your debt in full, and that is what every lender wants to see. I have had a chance to see that effect on my own personal credit score after paying off a car loan in full.

That said, credit score is not a goal of its own, being able to manage your credit well is. Credit score just shows how well you're managing your credit. Definitely not something you'd want to pay 9% APR for.