Expert: Regan Shinski - 4/4/2009

Question
QUESTION: I am trying to repair my credit.  Right now my score from the Big 3 ranges between 568 and 590, I have an auto loan and I am in the position of being able to pay it off.  Would this help my credit or would it be better to continue making my monthly payments.

ANSWER: James,

As with most credit issue the answer is "it depends."  However, if the loan is late AND active (meaning you have the vehicle and it is an open loan with the original creditor) you will benefit to pay it off.

However, if it is a new loan with little or no history - say 3-6 months or less, you will likely not see as big of a bump as if the loan has a long history and is near its full term anyway.  You typically get the biggest benefit on your credit on installment loans that are about 18 months or older.

If you have a significant revolving debt ratio - credit card balances compared to available credit, it likely would help your score more to use the money reduce the credit card balances.  This is providing you can still afford the monthly payment on the vehicle and will not recharge the cards back up.

If this is an old repossession, charged-off loan, or a loan with a third party collection agency it may be better NOT to pay the balance.  This is a complicated scenario and I would need more details to say for sure, so forward more information before you pay off if that is the case.

In any case, if you have EVER been late 30 days or more on this loan, it is worthwhile to contact the creditor and try to get the late payments "corrected" from your credit reports in exchange for paying off the loan.  Something as simple as "I'm thinking of paying this loan off but noticed a 30-day late payment last year.  I don't think that is correct.  That should be deleted/corrected before I pay this loan off."  The larger companies likely will not do anything, but smaller creditors may.

Finally, consideration should always be given to interest rates and monthly payment obligations.  The above options are related ONLY to credit score impact.  Often, it is best financially to pay off debt with the highest interest rate, other times it makes sense to pay off more accounts to reduce monthly debt obligations.  It depends on what you are trying to do.

---------- FOLLOW-UP ----------

QUESTION: I have had this particular loan for almost 3 years, and have never been over 30 days past due on it, it is at a higher interest rate, and was trying to see if the pay off would help my score.

Answer
Yes.  Very likely it would help your score with one possible exception:  if you have little or no other open accounts reporting on your bureau reports, paying this off could leave you with too few (or even zero) open accounts.  This is the only scenario where I could see your score would stay neutral  - if this is your only active and positive account.

Remember, credit is managing open credit credit responsibilities as well as having fewer derogatory accounts reporting.  

If you are a "typical" consumer and have other credit obligations reporting, paying off any debt typically helps.  When you go for larger purchases such as real estate or vehicles, an underwriter will physically review your credit accounts and see an early payoff.  This can also help even if not reflected in the score.

How much paying this off will increase your score is virtually impossible to predict.  If it is a decent percentage of your total debt, you should see a bump.  If you have a lot of credit debt or maxed out cards, consider paying them first if you can still afford the vehicle payment - see previous answer.