Establishing Credit

Should I pay off my car loan early?

Dear Experian,

I took out a car loan to help build my credit. I was thinking about paying if off in February. I would have had the loan for only seven months when I pay it off. Would it boost my score to pay it off super early or would it be better to keep the loan for the full three years?


Dear AJO,

As long your loan agreement does not include any penalties for paying the loan off early, doing so could save you money by eliminating interest fees over the life of the loan. If the payments have always been made on time, the account will still have a positive effect on your credit history, even after it's paid off and closed.

Keeping your Car Loan Open Can Help Credit Scores

However, open positive accounts may have a greater impact on credit scores than closed accounts. Open accounts show how you are managing your credit currently, rather than just how you have managed it in the past. If you are still in the process of trying to establish credit, it may be more beneficial to leave your car loan open a while longer, at least until you have had the opportunity to open another account or two.

For instance, if you don't already have a credit card, consider applying for one before paying off the loan. Installment loans have fixed loan amounts and set monthly payments, but with a credit card, you dictate how much you spend and how much you pay off each month.

Because of this, credit cards are considered especially good indicators of your ability to manage your credit and your debt. That does not mean you should go apply for a lot of credit cards. You only need one or two.

Using a Credit Card to Establish Your Credit

As long as you make all of your payments on time, a credit card can help you establish credit and boost credit scores a bit more quickly than an installment account.

Although you have the option to carry balances over from month to month, it isn't necessary to do so.
Paying off your credit card balance in full every month means you will avoid paying interest on your purchases, which is good for your wallet. It also helps to keep your credit utilization rate low, which is great for credit scores.

Learn more tips on establishing credit.

Thanks for asking,
The "Ask Experian" Team