I’ll have enough saved to start applying for mortgage rates in 2-3 months, but my car is paid off in 4 months. I’ve heard that paying off a car can temporarily lower your credit score for a few months. Could this affect me during the mortgage process?
Paying off a car loan usually doesn’t impact your credit unless it’s your only type of installment credit. Do you have other forms of credit, like credit cards or different loans?
Juno said:
Paying off a car loan usually doesn’t impact your credit unless it’s your only type of installment credit. Do you have other forms of credit, like credit cards or different loans?
I have student loans and a couple of credit cards with small balances. I was concerned because this car loan is my only non-student loan installment credit, and I’ve heard it could drop my score by up to 40 points. I wish the credit scoring system were more transparent.
@Adler
You might want to get a credit check done just before your final car payment. That report will be valid for 90 days. If you can close on a house within those 90 days, any potential score drop from paying off the car won’t matter.
@Adler
Credit cards are considered revolving credit, which is different from installment loans like your car loan. It’s best to pay your credit card balances before the statement closes to show zero balances. This might affect how much you can borrow, so waiting until after your car is paid off might be wise.
@Ainsley
It’s actually about how much of your credit you’re using. People who manage lots of credit card debt well can still have good credit scores by moving their debt around or taking advantage of zero interest balance transfers, though it’s risky.
@Rowan
On your credit report, factors like how long you’ve had accounts open, and your balance-to-limit ratio play a role. Keeping card balances low or paid off before your statement date can help improve your score.
If you only have a few months left on your car loan, lenders usually won’t count it in your debt-to-income ratio. You could start applying for mortgages now and handle both payments for a month or two.
@Arlo
That’s correct. If there’s less than six months left on a loan, it generally isn’t included in your debt calculations. You could start the mortgage process now and possibly finish within 60 days, bypassing any issues from the car loan payoff.
Generally, paying off a car loan shouldn’t negatively impact your credit score.
Winter said:
Generally, paying off a car loan shouldn’t negatively impact your credit score.
However, credit scores can sometimes decrease unexpectedly after paying off a loan. The credit system can be unpredictable.
Consider having a credit check done a month or two before you finish paying your car loan. This way, the credit score used for your mortgage application won’t be affected by the final payments.
You can get your credit checked before paying off the car, and that report will be used for the whole mortgage process. Make sure the initial credit check is thorough, and try to finalize your home purchase within 120 days, being under contract in 90 days.