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I saw another question like this, but I am in a bit of a different situation.

I am 19 years old, in college, and have no credit history.

I saved up enough money to buy a car, but decided to get a loan and have the payments pulled automatically from my account so that I can build credit.

While I'm paying off the loan, I'm required to have full coverage insurance (and thus a higher premium than I would like).

My plan was to pay off the loan in 6 months and then reduce my coverage to liability, however I've heard that the loan won't show on your credit report correctly (which was the whole point of getting the loan in the first place!)

After I pay off the car loan, I plan to get a credit card and pay it off every month to continue building my credit.

Would it be better to pay off the loan early and save some money, or pay it off for the entire 18 month period and hemorrhage money the whole time?

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    Pay the loan off. There are better (cheaper) ways to build credit. – D Stanley Jun 15 '17 at 19:37
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    Only get rid of the full coverage insurance if you can afford to lose your car. – Nosrac Jun 15 '17 at 19:39
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    If you can afford it, you should pay off the loan immediately. You're saying you want to pay interest, just to build credit? That's crazy. There are FAR better ways to build credit. I've never paid any interest on anything in my life, and my score is near 800. Get a credit card, start using it for every purchase you make, and pay it off in full every month. – ell Jun 15 '17 at 20:20
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    What interest rate are you paying on the car loan? – TTT Jun 15 '17 at 20:53
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    @A.Kirk That's a bummer of an interest rate, ditch it, imo. Have you applied for a credit card already? – Hart CO Jun 15 '17 at 21:54
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Personally, I don't think that the interest from the car loan is worth the credit history you're building through it. There are other ways to build credit that don't require you to pay interest, like the credit card you mentioned (so long as you keep paying off the balance). So I'd go that route: ditch the auto loan and replace it with a line of consumer credit. Just be careful not to overspend because the card will likely have a higher interest rate than your loan.

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    It's rational for an individual to run their expenses through a credit card to build credit or earn rewards. But as a society, the costs (e.g., interest, penalties, annual fees, and the 1 to 3 percent cut of each merchant transaction) probably outweigh the benefits. It's kind of an unfortunate paradox. – thohl Jun 17 '17 at 2:45
  • Cost of merchant transactions might very cost nothing (depending on where you live). And a credit card can be paid off automatically just like OP's car payments. – Hennes Jun 18 '17 at 13:20
  • I'll note in passing that a sentence of the form “[cost] is not worth [benefit]” is, besides just plain weird, possibly confusing to foreigners. – Anton Sherwood Jun 19 '17 at 3:07
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Something I'd like to plant firmly into your mind - If you're able to save up enough money to buy the things you want outright, credit will be of little use to you.

Many people find once they've accumulated very good credit scores by use of good financial habits, that they rarely end up using credit, and get little out of having a 'great' credit score compared to an 'average' credit score.

Of course, a lot of that would depend on your financial situation, but it's something to keep in mind.

As stated by others, and documented widely online, you don't need to make payments on a loan or carry a card balance to build your credit history.

Check your credit on a popular site, such as Credit Karma (No affiliation).

There, you'll see a detailed breakdown of the different areas of your credit profile that matter; things like:

  • Your utilization: Keep this under 30% of your credit limits on cards for good scores, and 0% is okay too
  • Your average age of account history - longer is better
  • Your number of open accounts, and total accounts
  • Your payment history - the number of monthly payments you haven't missed - Not having a balance counts too.
  • The types of accounts you've had - Banks / Lenders may want you to have some actual loan history in your profile before some other types of loans, like a home loan, but not a requirement by far, and depends on the lender what their criteria are.
  • Records entered against you like judgements, collections, bankruptcies, etc.

The best thing I could recommend is get a credit line or credit card, and use it responsibly. Carrying a balance will waste money on interest, much like the car payment. Just having it and not over-using it (Or not using it at all) will 'build' your credit history.

Of course, some institutions may close your account after X number of years of inactivity.

With this in mind, I'd say it's safe to pay off the car loan.

Read your agreement and make sure there aren't early termination / early payment fees for this.

Edit: There have been notes in the comments section's of question/answer's here about concerns with getting apartment. My two cents here: Most apartments I've seen check your credit for negative marks.

Having no credit history, and thus never missing a payment or having a judgement made against you, will likely be enough to get you into most normal-quality apartments, assuming the rest of your application / profile is in order, like: - Good references, if asked for them - At least 2.5x rent payment in gross income

etc, things like that. If they really think you're a risk, they may ask for a larger deposit (Though I'm sure in some areas there may be restrictions on whether they can do this, or how much they can do it) and still let you rent there.

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    The last sentence is gold! – Michael Jun 15 '17 at 20:38
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    Solid advice about the loan. Re:"If you're able to save up enough money to buy the things you want outright, credit will be of little use to you" -- OP mentions in comments wanting to get an apartment, which often involve credit checks. So there are legit reasons to care about your score to a certain extent. – user40002 Jun 15 '17 at 21:18
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    Also, I just called my bank and there are no early termination, early payment, or extra payment fees. – A. Kirk Jun 15 '17 at 21:34
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    @A.Kirk I've had similar concerns, but have never run into issues. I personally use credit cards for most things that I purchase or pay for, and pay them off at the end of the month in full, to get whatever perks may be associated with the card(s). But I've never had a loan, and won't until I buy a house. And I've been pre-approved for quite the large home loan, upon checking, and don't anticipate any issues with getting one for the house I intend to purchase in the future. I'm certain that you'll be fine with paying off the car, opening a credit line and rarely using it. – schizoid04 Jun 15 '17 at 21:47
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    " If you're able to save up enough money to buy the things you want outright, credit will be of little use to you." - That's not quite true. Having a good credit rating that you aren't using is the cheapest insurance policy possible - it costs you nothing in annual premiums, but if you do have the misfortune to be in an emergency situation, you can take up the credit, instead of hoping the insurer will pay out on your claim after your premiums have already "paid for your accident in advance, by installments" – alephzero Jun 16 '17 at 0:52
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Contrary to popular belief, you can build your credit (if that is important to you) without paying a penny in interest. This is done through the responsible use of credit cards, paying the bill in full each month without accruing any interest charges.

If I were you, I would pay off the loan today, if possible. After that, if you decide you need to build up your credit, apply for a credit card. If you have difficulty with that, you can get a small secured credit card or retail store credit card until you have enough history to get a regular credit card.

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Generally, banks will report your loan to at least one (if not all three) credit bureaus - although that is not required by law. The interest you're paying, in addition to your insurance isn't justifiable for building credit. I would recommend paying the car off and then perhaps applying for a secure credit card if you are worried about being rejected. Of course, since you have very little credit, applying for an unsecured card and getting rejected won't hurt you in the long run. If you are rejected, you can always go for a secured credit card the second time.

As I mentioned in my comments, it's better to show 6 months of on-time payments than to have no payment history at all. So if your goal is to secure an apartment near campus, I'm sure you're already a step ahead of the other students.

6

Your plan isn't bad, but it probably isn't worth the cost for the small amount of credit building it will achieve. If you do decide to continue with it though, you'll save in interest if you make the big payment now rather than in 6 months. In other words, you can take the minimum payment, multiply it by 5, subtract that amount from the total you owe and pay the difference immediately. This way you'll still get the 6 months of reporting to the credit bureaus, but you'll pay less interest since you'll have less principle each month.

I would recommend applying for the credit card right now. I believe you'll probably get approved now. If you do, then pay off the car loan without thinking about it. (If you don't get approved, think about it, then probably still pay it off.)

Regarding the full coverage insurance, even after the loan is paid off and you aren't required to have it, you may still want to keep it. Even if you're the best driver on earth, if someone hits you and doesn't have insurance, or they have insurance and drive off, or a deer runs in front of you, etc, you'll lose your car and won't be reimbursed. Also, as Russell pointed out in the comments below, without collision coverage your insurance company has no incentive to work on your behalf when someone else hits you, so even if it's not your fault you may still not get reimbursed. So, I wouldn't pass on the full coverage unless your car isn't worth very much or you can stomach losing it if something happens.

Good luck, and congrats on being able to pay for a car in full at 19 years old.

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    To your point on the insurance, though - You're paying a premium that's rigged against you either way. Your premium is calculated so that the chance of you getting hit by or hitting another car is factored into the amount they'd expect to cover for your vehicle, with whatever their expenses and profit margins are added on top of that. Theoretically, NOT having insurance should pay for itself over time, assuming you'd have the same number of accidents. Good reference: mrmoneymustache.com/2011/06/02/… – schizoid04 Jun 16 '17 at 0:29
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    @schizoid04 Macro theory is way different from micro reality. Statistics require a huge sample set to be anywhere near accurate. You are a sample size of one and an insurance company has a sample size of millions. – quid Jun 16 '17 at 0:55
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    The collision portion of 'full coverage' is not what covers you in any of the examples you provided. Uninsured motorist is what covers you in your first example and is relatively cheap compared to collision and hitting an animal that runs out in front of you is covered under comprehensive, again much cheaper than 'collision' insurance for a 19 year old. I personally never had collision until I turned 25 and had claims for both of your examples before then. – Travis Jun 16 '17 at 16:06
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    Without full coverage, if someone hits your car, and it's clearly their fault, and they have insurance, you probably still won't be reimbursed, because the other insurance company will claim you're at fault and your insurance company won't argue it because they have no incentive to do so -- they aren't paying either way. – Russell Borogove Jun 18 '17 at 20:00
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    @TTT The other insurance company will gamble that you don't have the time and energy to go to court with it. Get full coverage. – Russell Borogove Jun 22 '17 at 14:06
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Typically the power of capitalized interest would work in your favor and you could carry the loan paying it down while investing the original sum which would earn interest. BUT you aren't going to get any sort of return to compare with 15% so pay off that loan immediately.

Also contrary to popular belief (and reiterated here) paying off incurred balance on your credit card every month is responsible use of credit but it will not do much for your credit score.

The score ultimately means your ability to pay your bills and most importantly your willingness to pay interest, i.e. revolving the borrowed money. At least in the consumer market where the product they want you to buy is paying monthly interest charges.

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Pay it off. Pay it off. Pay it off!

Credit reports have line items that, if all is well, say "paid as agreed." A car loan almost certainly gets reported. In your case it probably says the happy "paid as agreed." It will continue to say that if you pay it off in full.

You can get the happy "paid as agreed" from a credit card too. You can get it by paying the balance by the due date every month, or paying the mininum, or anything in between, on time. But you'll blow less money in interest if you pay each bill in full each month. You don't have to carry a balance.

In the US you can get a free credit report once a year from each of the three credit bureaus. Here's the way to do that with minimal upsell/cross-sell hassles. https://www.annualcreditreport.com/ In your situation you'd probably be smart to ask for a credit report every four months (from each bureau in turn) so you can see how things are going. They don't give you your FICO score for free, but you don't really care about that until you're going for a big loan, like for a condo.

It might be good to take a look at one of those free credit reports real soon, as you prepare to close out your car loan.

If you need other loans, consider working with a credit union. They sometimes offer better interest rates, and they often are diligent about making credit bureau reports for their good customers; they help you build credit.

You mentioned wanting to cut back on insurance coverage. It's a worthy goal, but it's generally called "self-insuring" in the business. If you cancel your collision coverage and then wreck your car, you absorb the cost of replacing it. So think about your personal ability to handle that kind of risk.

  • My bank actually allows me to see my credit score for free, updated once a month. My score was 577 before I got my car loan and it hasn't quite been a month yet so I'll see what it's like after my first payment. – A. Kirk Jun 17 '17 at 18:21
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Pay it off....I've only ever paid interest on mortgages to buy the houses I've lived in (I paid both mortgages of years ahead of schedule) & as a result my credit rating's way above average, I use credit cards for everything, pay 'em off in full every month unless I'm paid not to (currently have around 8,000 sitting interest free while the cash earns 6% elsewhere). Life's sweet if you understand the system. Hell if you don't. Keep saving...

  • What great advice. – Fattie Jun 22 '17 at 13:54
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First, don't owe (much) money on a car that's out of warranty. If you have an engine blow up and repairs will cost the lion's share of the car's bluebook value, the entire car loan immediately comes due because the collateral is now worthless. This puts you in a very miserable situation because you must pay off the car suddenly while also securing other transportation!

Second, watch for possible early-payment penalties. They are srill lokely cheaper than paying interest, but run the numbers. Their purpose is to repay the lender the amount of money they already paid out to the dealer in sales commission or kickback for referring the loan.

The positive effects you want for your credit report only require an open loan; owing more money doesn't help, it hurts. However, interest is proportional to principal owed, so a $10,000 car loan is 10 times the interest cost of a $1000 car loan. That means paying most of it off early can fulfill your purpose.

As the car is nearer payoff, you can reduce costs further (assuming you cna handle the hit) by increasing the deductible on collision and comprehensive (fire and theft) auto insurance. It's not just you paying more co-pay, it also means the insurance company doesn't have to deal with smaller claims at all, e.g. Nodody with a $1000 deductivle files a claim on an $800 repair.

If the amount you owe is small compared to its bluebook value, and within $1000-2000 of paid off, the lender may be OK with you dropping collision and comprehensive coverage altogether (assuming you are).

All of this adds up to paying most of it off, but not all, may be the way to go. You could also talk to your lender about paying say, 3/4 of it off, and refinancing the rest as a 12-month deal.

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protected by Chris W. Rea Jun 22 '17 at 14:04

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