Can repaying a loan affect your creditworthiness?
Don’t worry, paying off a personal loan very rarely lowers your score, but it does happen sometimes. Wait a minute, you read that title, right? Can Repay a Personal Loan Lower Your Credit Score? Unfortunately, it is indeed possible. Fortunately, this is far from the norm. We will repeat this point later, but paying your debts almost always improves your credit rating. So if you remove just one from this item, you will have to pay your bills on time and in full. Okay, now we’re going to deal with this.
But first, let’s check the credit scores.
If you read the Financial Sense blog regularly, you probably already know the factors that make up your credit standing, both internally and externally. But that could be someone’s first financial item! So let’s do a quick review. The three main credit bureaus, Experian, TransUnion, and Equifax, collect financial information that is used to compile your FICO credit score. FICO values range from 300 to 850. The higher the value, the better the loans and interest rates.
There are five factors that can affect your credit score. In descending order of importance, they are:
- Payment history
- amounts due (also called credit usage)
- the length of your credit rating
- Credit composition
- new requests
Would you like a closer look at each of these factors and the activities you need to do to influence them positively? Then we have an article for you! Almost never.
As we pointed out in the first paragraph, paying off your loans almost always has a positive effect on your credit standing. In fact, timely payment to your accounts is the most important factor in calculating your credit rating. Where does this error come from?
I think it’s when you pay a credit card in full then close the account. When you close a credit card, it can affect your credit because you just reduced the amount of available credit, which increases your credit usage is the second most important factor in credit rating. In general, you want to keep the use of credit below 30%. Suppose you have two credit cards, each with a limit of $4,000, and your credit card balance is $3,500. Since your balance is only 25% of your total available balance between your two cards, you are in good shape. However, watch what happens when you close one of these credit cards.
Suddenly, your total available balance is only $4,000. And if you have a balance of $3,500, your credit usage has doubled to 50%. In this case, your credit rating will certainly decrease due to high credit usage. Conclusion: Paying your credit card never affects your score, only if you close the card forever. This is the history of credit cards. But maybe there are cases where paying an installment loan will negatively affect your credit rating? But not quite ever.
There are actually a few cases where paying off a loan can have a slightly negative impact on your score. That said, there is a gray area where some final payments may not be very helpful. This especially applies to old collection accounts that are about to default on your credit report or that you already have.
If the debt is no longer credited to your balance (theoretically seven years after the last change in your account, for example, punctual or late or late, although in practice seven and one), you can expect a semester), they have no impact on your credit rating.