Will Car Loan Payoff Improve Credit Score?

By Baukus Mello Features Bankrate.com

Vehicles wait during a traffic jam along a major thoroughfare in Beijing August 10, 2007. The Chinese capital will hold a test drill for keeping cars off the road during its 2008 Olympic Games, a crucial hurdle for the city beset by pollution and ... traffic jams, officials announced on Friday. Between Aug. 17 and 20, about 1.3 million of the city's 3 million vehicles will be ordered off the streets each day depending on whether licence plates end in an odd or even number. REUTERS/Claro Cortes IV (CHINA)

Dear Driving for Dollars,
Will my credit score go up if I pay off the remaining balance on my car loan?
-- Stacey

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Dear Stacey,
Paying off an installment loan -- a loan that is for a fixed amount for a set term such as a car loan or a mortgage -- will not cause a significant boost in your credit score.

When the credit bureaus look at installment loans to calculate a credit score, they assess your history with that loan. They look at whether you've paid on time or late, and if you've been late, by how many times and the number of days each time.

Paying off the car loan will result in that account being closed and it becoming part of your credit history. The activity (positive or negative) on an open account affects your credit score more than a closed account.

Even if you don't get a boost to your credit score by paying off your car loan, you may still want to consider it. It may save you money on interest. Use Bankrate's car early payoff calculator to see how much you will save. Before you pay off your car loan, make sure there isn't a prepayment penalty. That could negate the amount you save in interest.

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