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How Will Paying Off a Loan Affect Your Credit?

By
Laura Adams, MBA,
September 10, 2010

Q. I've come into a bit of money and can pay off my existing car loan which is about $4,000. Would it be better for my credit score (which is horrible and I am trying to fix) to pay off the entire loan or to pay it off in increments over the remaining life of the loan?

A. Paying off the entire car loan balance at once should boost your credit score more quickly than paying it off over time. When you have less debt relative to your overall available credit, you decrease your credit utilization ratio, which positively affects your credit score. According to myfico.com, credit utilization affects your credit score by as much as 30%.However, before you spend your cash, make sure that you have an ample emergency fund saved up.

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