Mary Grace McCormick, Credit Writer
@mg_mccormick
Yes. Paying off an installment loan can hurt your credit in the short-term. When you pay off a loan, you close an active account and your mix of credit accounts may decrease, if you have no other installment loans open. Both factors contribute to credit score calculations, so losses in those areas can result in a temporarily lower score.
Open and active accounts that are in good standing are beneficial to your credit score because they demonstrate that you are currently managing credit well. Once an account is closed, it remains on your credit report for up to 10 years. After the 10 years have passed and the account drops off your credit report, it no longer contributes to your credit score.
Everyone’s situation is different, though, and a lot depends on what kind of shape the rest of your finances are in. To get a sense of how paying off a loan will affect your credit score in particular, try WalletHub’s free credit score simulator. It uses your actual credit data to give you a preview of what’s to come for your credit score as a result of different actions you may take.
Just remember that even though paying off an installment account can temporarily hurt your credit, your credit score should recover quickly, as long as you have other accounts with positive payment histories. Approximately one-third of your score is based on your payment history. You can track your progress with free daily credit score updates on WalletHub.
People also ask
What is an installment loan?
It is a loan that comes with a set number of planned payments. The installments are fixed or variable, depending upon the interest rates. For an instance, a mortgage loan can be categorized as an installment loan.
It benefits all the parties involved in a transaction, including the consumer, who can afford big-ticket items; seller can increase sales volume, and the creditor can charge higher interest rate against these loans.
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