My girlfriend, who is more knowledgable about finance than myself, claims this is true. This seems counterintuitive to me and I need some more insight.
In: 5
It depends on the nature of the debt.
If it is a credit card, you can pay the balance off daily and it will still have a net positive effect on your score as long as the credit card itself remains open (which it will, if you use it at least once a year or so). This will keep your reported credit utilization low (good), keeps a history of on-time payments (good), and gradually increases the average age of your credit lines (good).
If we’re talking about a loan like for a car or for a mortgage, then paying it off early *does* hurt your score, because the account is closed out once you pay it off.
It is not going to outright *tank* your credit score as long as you otherwise have positive factors and a good credit history, but it *is* something to be mindful of when planning out future loans. For instance, if you’re planning on opening a mortgage to buy a house in a couple months, and you have an auto loan that has eight months of payments left but you can pay it off *today*… well, it could actually be better to just keep making the regular payments on that auto loan so you don’t drop your credit score before opening the mortgage.
But, if you don’t feel like you’re going to need any new loans for the next several months and you have other steady ways of building and maintaining credit (like having a few credit cards open at once that you are using responsibly), then paying off the car loan today would drop your score, but you’d probably rebuild it before the year closed out anyway.
And as Experian writes – https://www.experian.com/blogs/ask-experian/why-did-my-credit-score-drop-when-I-paid-off-a-loan/ – the negative effect varies depending on a *lot* of different factors, and in some cases a person might not experience any score drop or their score might even go up a little. But, imo, because of the possibility that it *does* go down, it’s good to plan around, especially for situations like I mentioned.
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