How Will Paying Off a Loan Affect Your Credit?
Laura Adams, MBA
Q. I’ve come into a bit of money and can pay off my existing car loan which is about $4,000. Would it be better for my credit score (which is horrible and I am trying to fix) to pay off the entire loan or to pay it off in increments over the remaining life of the loan?
Answer. Paying off the entire car loan balance at once should boost your credit score more quickly than paying it off over time. When you have less debt relative to your overall available credit, you decrease your credit utilization ratio, which positively affects your credit score. According to myfico.com, credit utilization affects your credit score by as much as 30%.However, before you spend your cash, make sure that you have an ample emergency fund saved up.
Related tips:
- Know Your Credit History
- Where to Get Your Credit Score
- How to Raise Your Credit Score Quickly
- Emergency Money for a New Economy
Image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.