Ask Creditnet: How Fast Should I Pay Off My Car Loan?
February 15th, 2012
Dear Creditnet: I want to improve my credit scores, but the only type of credit I have at the moment is a car loan. I haven’t used credit cards in years.
I have the ability to pay off my car loan early and save money on interest, but should I keep making payments for the entire life of loan to help boost my credit scores? I know that making more payments over time is probably better for my scores, but the interest rate on this loan is really high.
Answer: I never recommend staying in debt simply for the benefit of your credit scores. If you can pay off the auto loan early, do it and don’t look back. Saving as much money as possible on interest is more important.
Meanwhile, what you should be focusing on is improving your credit scores through the responsible use of credit cards. Unlike an auto loan, there’s no need to actually go into debt with a credit card in order to build the type of positive payment history that’s necessary to enjoy great FICO scores.
I’m not exactly sure why you haven’t used credit cards in years, but you should seriously reconsider your decision if you’re the type of person that isn’t tempted to spend more money than you have when using a credit card instead of cash. If you can commit to using a credit card sparingly and always paying your balances on time and in full each month, then you’ll be able to quickly improve your credit scores without taking on any debt or paying a cent in interest.
Credit-scoring models do like to see a healthy mix of credit in your history, which means you’ll score points for showing that you can responsibly handle not only credit cards but also installment loans like a mortgage or auto loan. While paying your auto loan off early will close the account, the good news is the payment history associated with it will continue to have a positive impact on your scores as it will live on your credit reports for many years to come.
Posted By: Joshua Heckathorn | Category: Ask Creditnet Questions | Comments (0)
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