Paying a loan as agreed is one of the best things you can do for your credit over time. But the effect of paying a loan off completely is a little more nuanced than many people expect.
Payment history matters most
Payment history is the single most important factor in the widely used FICO scoring model, making up about 35% of the score. Each on-time payment reported to the credit bureaus helps build a positive history. Late payments, on the other hand, can hurt your score and stay on your report for years.
What else goes into your score
- Amounts owed: about 30%
- Length of credit history: about 15%
- New credit: about 10%
- Credit mix: about 10%
What happens when you pay off a loan
Paying off an installment loan means you no longer owe that debt, which is good for your finances. Your score may shift slightly afterward, sometimes dipping a little, because the account is now closed and your mix of active accounts changes. Any small dip is usually temporary, and the closed account and its on-time history generally stay on your report for years.
Ask whether your lender reports
A loan can only help your credit if the lender reports your payments to the credit bureaus. Not every lender reports to all three bureaus, so if building credit is one of your goals, ask before you borrow.
Tips for building credit with a loan
- Pay on time, every time. Autopay helps.
- Borrow only what you can comfortably repay.
- Avoid applying for lots of new credit at once.
- Check your credit reports regularly for errors.
Learn how to read your report in Understanding Your Credit Report: A Beginner’s Guide.
