What Happens To Your Credit Score When You Pay Your Loans Off Early?

Written By Mary Beth Eastman
Last updated December 8, 2020

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August 9, 2019

Simple. Thrifty. Living.

Whether it’s your student loan, car loan, or personal loan, sometimes you succeed at your financial goals and manage to pay off your loans early. But how does paying off your loans early impact your credit score? Here are a few aspects to consider:

Your credit score typically increases when you pay loans off early. If you pay off your loan too early, you may not see much of a difference in your credit score. For example, if you have a loan with a six-year term but pay it off in two months instead of three years, you may not notice much of an impact on your credit score. That’s because it takes time to build a history of on-time payments, which is a factor that usually impacts a large percentage of your credit score.

Paying off your federal student loans early or your mortgage may mean you won’t be able to take advantage of tax deductions, such as the student loan interest and mortgage interest. However, you may find it more beneficial to save on interest over the life of the loan compared to the tax savings you get from these types of deductions. That means more money to save or use as you see fit, such as contributing more to your retirement fund.

Some lenders charge a fee for paying off your loan before specific dates. For instance, many auto lenders charge a pre-payment penalty. They often charge these fees to ensure that they earn a profit. So, it’s always smart to ask your lender about incurring fees for paying your loan off early. If your loan does charge pre-payment penalties, see if paying the loan through its full term is cheaper than paying it off early.

Getting another loan is a personal choice. But it’s important to know how another loan impacts your credit score, even after you pay off your loans early. Once you repair your credit, it’s also important to review your personal situation to determine if you’re in a financial position to borrow money, if you’re considering taking out another loan. It’s not ideal if you get more loans if it only puts you into more debt that you won’t be able to pay back. If you do decide you’re ready, play it safe by borrowing from a reputable online loan company. And don’t forget to check on those fees!

Paying off your loans early often has more advantages than disadvantages. But it’s still important to do your research and determine if paying your loans early is right for you. Evaluate your financial situation and compare the costs of paying off your loan early. By taking these measures, you can see if it benefits you to pay your loans off early or not.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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