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Which is better for your credit score, in terms of paying off a loan?

  • Paying the minimum every month, on time, through the entire period of the loan
  • Paying a certain amount above the minimum every month, on time, until the loan is paid off a bit early
  • Paying the minimum every month until you've saved up enough money to pay off the rest of the loan, then paying off the loan in one lump sum at some point earlier than the term of the loan
  • Paying above the minimum every month and then paying it off with a lump sum
  • Something else? A combination of the above?

Assume the loan does not have a prepayment penalty, though if that makes a difference in terms of credit please explain.

I'm in the USA so I'm looking for either USA-centric answers or globalized answers - I believe these things differ from country to country so please keep that in mind if it is the case.

  • I assume that you are worried about your score because the rest of your finances are in order, right? You have an emergency fund, no unsecured debt and a balanced budget. In a lot of cases, a healthy financial life will be the same habits to have a good credit score. – MrChrister Aug 1 '11 at 20:54
  • Yes, everything is in order and my credit score is excellent (though the history is thin, given that I'm young). I was mainly just wondering. – Ricket Aug 1 '11 at 22:32
  • Is just paying the whole thing off every month off the table? – JohnFx Aug 2 '11 at 4:32
  • Um John, notice the word LOAN up there? not credit card. – Chuck van der Linden Aug 2 '11 at 7:38
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Given the exact formula that goes into the 'Fair Issac" calculation is a closely guarded trade secret, AND that each agency has their own formula, I'm not sure there's really any 100% for sure authoritative answer to the question in terms of which option would be best.

There are a lot of balancing factors, like how long you've had accounts, payment history over time, etc. Stuff that is known to HURT a score can include things like closing a longstanding account. If you have a very low interest loan (like some car companies offer now and then) I'd just make the normal payments. If you have something at a higher interest rate, especially above 6-7%, then I'd worry less about credit score and more about how much I'm going to pay in interest and pay it off as rapidly as I could.

The big key is 'never pay late' more than anything else, Followed by how much of your debt capacity is used (which paying down any account, loan or credit card, will help), and long standing relationships (length of history) See this (approximate) chart and notice that any early payoff is basically going lower your 'capacity used', possibly reduce the types of credit used (if it's the last loan of that type), all of which should help your score.

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    +1 This is a good answer. One small detail, you say "how much debt you have compared to your income". The credit rating agencies have no way on knowing your income. What they factor in is how much credit you use compared to credit how much you have available. I think this is what is referred to in the chart as "Capacity used". – KeithB Aug 1 '11 at 20:46
  • Good answer. I think this is assuming a single debt? If there are other debts in the mix the answer might be different. – MrChrister Aug 1 '11 at 20:56
  • Good point @KeithB. Although I'm not too sure (since they have your SSN) that they might not have some way to know income. or they might be able to infer it based on how much credit various people are willing to extend to you. These folks invented datamining years ago, so I'd not put a lot past them. – Chuck van der Linden Aug 1 '11 at 21:10
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    I am pretty sure that income doesn't factor into your credit score at all. – JohnFx Aug 2 '11 at 4:33
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    I had to vote this down as you are repeating some information that just isn't factually accurate. Paying off a loan never has a negative credit implication and doesn't affect the the length of your credit history. Also, credit rating agencies have no idea what your income is -- banks request this information from you when you apply for credit. – duffbeer703 Aug 2 '11 at 12:24
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Paying on time is the most critical factor. Paying ahead on the loan will not help you from a credit score POV, but it will not hurt you either.

In general, to maintain a good credit history, don't bother focusing on credit scores. Frankly, there is very little reason for you to even know what your score is. Just do the following:

  1. Do what you agree to do in your contracts. (ie. make payments every month on or before the due date)
  2. Maintain at least one credit card or other open credit line.
  3. Don't borrow more than you can afford to pay back.

Lenders want to deal with people with long histories of paying debts back on time.

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