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It's a pretty simple question, but I've read a lot of conflicting information on this. From my basic understanding of credit, I know that it's good to have lots of long-standing accounts. That's why it's bad to close old credit card accounts - because it will decrease the average age of your accounts.

How is paying off an old loan different than closing an old credit card account?

I mean, I can see how decreasing debt would decrease the debt-to-income ratio and thus enable me to get a larger mortgage, but CreditKarma.com seems to indicate that debt-to-income ratio doesn't mean jack to a credit score.

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    Just to be clear. Paying off credit cards is good for your credit score. Closing them is not. Pay them off and leave them open unless you have an annual fee.
    – JohnFx ♦
    Apr 17, 2012 at 2:29

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Debt to income ratio doesn't mean jack for credit score because your income is not reported to the credit agencies. It is verified, separately, by the lenders.

Paying off the loans is basically paying your obligations. If you don't pay loans - your credit score will undoubtedly go down.

Paying off loans early is what you probably meant. Well, it pays off because you pay less interest, regardless of the credit score. The age of credit history doesn't have to be based on open loans, in fact, loans paid off and accounts closed stay on your credit report for several years (up to 7, IIRC). So closing a card won't decrease the average age of your account immediately, but rather gradually over time. 7-10 years is long enough history for any purpose (and your bankruptcy stays the longest on the credit report - 10 years).

Credit to Debt ratio is relevant for revolving credit, not loans. I.e.: your credit cards, not your mortgage.

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    Gentlemen: don't forget that the OP is confusing types of loans. Avg. age of accounts for revolving credit do factor in, but a personal loan is different than say a mortgage or a credit card. For example, people with mortgages score higher, "everything else being equal" than those without. Can anyone of you expand on this later?
    – f1StudentInUS
    Apr 14, 2012 at 0:50
  • @f1StudentInUS different kinds of loans factor differently, and it doesn't seem to me that the OP is confused. What he's basically asking is "will it hurt me to pay off the loan", and the answer is "no". You have to pay the loan eventually, whereas with credit card accounts - you don't have to close them, and closing old accounts may indeed affect the length of the history, hence the question.
    – littleadv
    Apr 14, 2012 at 0:52
  • Notice his question "How is paying off an old loan different than closing an old credit card account?". If the loan indeed was a credit card, then I agree the OP's not confused; anything else, I am not so sure.
    – f1StudentInUS
    Apr 14, 2012 at 0:54
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    @f1StudentInUS context - what a nice concept:-) Take a car loan. You've got a loan going on for 3 years, you have 3 years history, and boom - you paid it off. Is it as if you closed a 3-years old credit card? That's what the OP is asking.
    – littleadv
    Apr 14, 2012 at 0:57
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    @f1StudentInUS - why not ask that question elsewhere on the site for a full answer :)
    – warren
    Apr 14, 2012 at 12:36
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I'll address the last comment you wrote "CreditKarma.com seems to indicate that debt-to-income ratio doesn't mean jack to a credit score."

From my article Your Credit Score;

FICO Score

Indeed, income doesn't count in the scoring. Bill Gates can trash his score by canceling his old cards and getting new ones at his favorite bank. And even if use 90% of my take home pay to juggle my debt, the score itself won't reflect this.

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  • Gentlemen: don't forget that the OP is confusing types of loans. Avg. age of accounts for revolving credit do factor in, but a personal loan is different than say a mortgage or a credit card. For example, people with mortgages score higher, "everything else being equal" than those without. Can anyone of you expand on this later?
    – f1StudentInUS
    Apr 14, 2012 at 0:50
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If you have sufficient cash to pay off a loan and still have enough of a cushion, then it is usually the best "investment" you could make. For instance, if the loan is charging you 8% annual interest, there is likely no risk-free investment that would yield you > 8%.

As far as impact on your credit, paying off the loan is likely to give you a positive benefit for a few reasons. While FICO is a black box to all but the modelers who build it:

  • Total amount of debt on your file will decrease, and, all other things being equal, less debt = higher score
  • The overall length of your credit history will not change, even if you pay off an installment loan
  • You establish a record of being able to make significant principal payments in a world where the typical customer pays min due. This may help you not just with FICO but also with lenders' proprietary credit models.
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