How Much Does Paying Off a Car Raise Credit Scores?

Since your credit score reflects how likely you are to pay back your loans, it's logical to assume that paying off your car loan entirely will raise your score. Paying off loans always helps your score somewhat; however, keeping up with your current bills is more important than paying off one bill. Make all your car payments on time and watch your credit score rise both before and after you pay off your car altogether.

Debt-to-Credit-Limit Ratio

Your debt-to-credit-limit ratio -- that is, how much total debt you owe compared to how much credit you have available -- is one of the most important factors in calculating your credit score, accounting for about 30 percent of your score as of 2011. Thus, if you pay off your car loan, your total debt will go down and this ratio will be smaller. If you do not owe a lot of other debt, this can raise your credit score significantly. The specific effect on your credit score of any credit action you take will vary depending on what's already in your credit report

Payment History

Your history of making on-time payments is the most important factor in calculating your credit score. You, therefore, will raise your credit score more over time by paying your car loan before its due date each month than you will if you make late payments and then pay off the entire loan. If you pay off your car on time but neglect your other bills, your repayment of the car loan will not counteract the negative effects of your late payment habits.

Credit History Length

Having a longer credit history usually helps increase your credit score, assuming your history is mainly positive (e.g, bills paid on time, no collections accounts). In a short credit history, paying off a large purchase such as an automobile will count more than in a long credit history, as doing this helps establish your credit. In longer credit histories, one or two negative items may count less if the overall picture is positive, so paying off your car may help you strengthen your credit score.

Mix of Credit Types

Having a number of different credit types, such as credit cards and installment payments, has a slight effect on your credit score, especially if you have a longer credit history. Thus, taking out a car loan may slightly increase your credit score. This gives you a foundation on which to build your credit score when you make monthly payments and eventually pay off your car loan.