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Dear Liz: I have a high-interest car loan (more than 10%) and just landed a part-time job to add to my full-time cash flow. I want to pay the car off as quickly as possible, but I have read and been told that paying a loan off early doesn’t help scores as much as paying the duration of the loan. Is there truth to this? It seems foolish, though, since won’t I be paying more interest?

Answer: The primary concern with paying off a loan is that the lender may stop reporting the account to the credit bureaus. Although there are limits to how long most negative information can stay on a credit report, there are no limits to how long good information can or must be reported.

Still, most lenders continue to report accounts that have been paid off for several years. If you can pay off a high-rate loan, you probably should, and trust that you’ll get “credit” for your on-time payments for years to come.

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Categories : Credit Scoring, Q&A

1 Comments

1

If you are actively house shopping for an imminent purchase, then you could consider waiting to pay off the loan. Mostly because you want to keep the cash on hand for the down payment. (Though if you’re close to the end, paying off the loan could help more.)

Other than that one, specific scenario – 10% is too much interest to pay just to potentially help your credit score.

When I was young and naive, I strung a $200 charge over two years at double digit interest because I thought it would help my credit. Don’t make my mistake :)