What impact does trading in a car have on your credit score?
Paying off your loan in full will most likely not help your credit score, and could potentially even hurt it. Because car loans are installment loans (and thus differ from consumer credit), lenders really only like seeing that you responsibly pay off your loans on time. They don't really care if you pay it off early--lenders like seeing open lines of credit as long as you manage them well. The hard inquiry will simply lower your credit score a few points for up to two years. So, from a credit score perspective, you're really not going to help yourself in this scenario (although it's not like you're going to be plummeting yourself either).
No. Credit scores are primarily built by doing the following: To build credit, get a few major credit cards and a couple of store cards. Use one of them to make routine purchases like gas and groceries. Pay them on time every month. You're good to go. I would hate to sell stocks to pay off a loan -- try finding a better loan. If you financed through the dealer, try joining a credit union and see if you can get a better rate. "It's possible the $16,000 was for more than the car.  Perhaps extras were added on at purchase time; or perhaps they were folded into the retail price of the car.  Here's an example.  2014: I'm ready to buy. My 3-year-old trade-in originally cost $15,000, and I financed it for 6 years and still owe $6500.  It has lots of miles and excess wear, so fair blue-book is $4500. I'm ""upside down"" by $2000, meaning I'd have to pay $2000 cash just to walk away from the car.  I'll never have that, because I'm not a saver.  So how can we get you in a new car today?  Dealer says ""If you pay the full $15,000 retail price plus $1000 of worthless dealer add-ons like wax undercoat (instead of the common discounted $14,000 price), I'll eat your $2000 loss on the trade.""  All gets folded into my new car financing.  It's magic! (actually it's called rollover.)  2017: I'm getting itchy to trade up, and doggone it, I'm upside down on this car.  Why does this keep happening to me?  In this case, it's rollover and other add-ons, combined with too-long car loans (6 year), combined with excessive mileage and wear on the vehicle." Regardless of how it exactly impacts the credit score, the question is does it help improve your credit situation? If the score does go up, but it goes up slowly that was a lot of effort to retard credit score growth.  Learning to use a credit card wisely will help you become more financially mature. Start to use the card for a class of purchases: groceries, gas, restaurants. Pick one that won't overwhelm your finances if you lose track of the exact amount you have been charging. You can also use it to pay some utilities or other monthly expenses automatically. As you use the card more often, and you don't overuse it, the credit card company will generally raise your credit limit. This will then help you because that will drop your utilization ratio. Just repeat the process by adding another class of charges to you credit card usage. This expanded use of credit will in the long run help your score. The online systems allow you to see every day what your balance is, thus minimizing surprises. "It is a legitimate practice. The dealers do get the loan money ""up front"" because they're not holding the loan themselves; they promptly sell it to someone else or (more commonly) just act as salesmen for a lending institution and take their profit as commission or origination fees. The combined deal is often not a good choice for the consumer, though. Remember that the dealer's goal is to close a sale with maximum profit. If they're offering to drop the price $2k, they either didn't expect to actually get that price in the first place, or expect at least $2k of profit from the loan, or some combination of these. Standard advice is to negotiate price, loan, and trade-in separately. First get the dealer's best price on the car, compare it to other dealer and other cars, and walk away if you don't like their offer. Repeat for the loan, checking the dealer's offer against banks/credit unions available to you. If you have an older car to unload, get quotes for it and consider whether you might do better selling it yourself. ========= Standard unsolicited plug for Consumef Reports' ""car facts"" service, if you're buying a new car (which isn't usually the best option; late-model used is generally a better value). For a small fee, they can tell you what the dealer's real cost of a car is, after all the hidden incentives and rebates. That lets you negotiate directly on how much profit they need on this sale... and focuses their attention on the fact that the time they spend haggling with you is time they could be using to sell the next one. Simply walking into the dealer with this printout in your hand cuts out a lot of nonsense. The one time I bought new, I basically walked in and said ""It's the end of the model year. I'll give you $500 profit to take one of those off your hands before the new ones come in, if you've got one configured the way I want it."" Closed the deal on the spot; the only concession I had to make was on color.  It doesn't always work; some salesmen are idiots. In that case you walk away and try another dealer. (I am not affiliated in any way with CU or the automotive or lending industries, except as customer. And, yes, this touch keyboard is typo-prone.)" Absolutely do not pay off the car if you aren't planning to keep it.  The amount of equity that you have from a trade in vehicle will always be a variable when negotiating a new car purchase.  By applying cash (a hard asset) to increase your equity, you are trading a fixed amount for an unknown, variable amount.  You are also moving from a position of more certainty for a position of less certainty.  You gain nothing by paying off the car, whereas the dealer can negotiate away a larger piece of the equity in the vehicle. The amount you are earning in the savings account is insignificant, since you would only have the money in the account for 1 month after purchasing the car.  The instant 1.5% cashback (or travel mile reward), on the other hand, can be significant. However, it is not normal for a car dealership to allow you to put $16k on a credit card.  The reason is that the fees that the dealer has to pay to process your credit card would be too burdensome.  Car dealers have a much smaller profit margin on their sales than a typical retail store, so if the dealer has to pay 3 or 4% of the sales price in credit card fees, it just eats up too much of their profit. If the dealer does allow you to put the entire purchase price on a credit card, be aware that they have already factored in their processing fees into the price.  You might be able to get a better than 1.5% discount by offering to pay with cash instead. The fluctuation of interest rates during the next year could easily dwarf the savings this attempt to improve your credit score will have; or the reverse is true. Will the loan improve your score enough to make a difference? It will not change the number of months old your oldest account is. It will increase the breadth of your accounts. Applying for the car loan will result in a short term decrease in the score because of the hard pull. The total impact will be harder to predict.  A few points either way will generally not have an impact on your rate. You will also notice the two cores in your question differ by more than 30 points. You can't control which number the lender will use. You also have to realize the number differs every day depending on when they pull it that month. The addition of a car loan, assuming you still have the loan when you buy the house, will not have a major impact on your ability to get afford the home mortgage. The bank cares about two numbers regarding monthly payments: the amount of your mortgage including principal, interest, taxes and insurance; and the amount of all other debt payments: car loan, school loans, credit cards. The PITI number should be no more than 28%-33% of your monthly income; the other payments no more than 10%.  If the auto loan payments fit in the 10% window, then the amount of money you can spend each month on the mortgage will not be impacted. If it is too large, then they will want to see a smaller amount of your income to go to PITI. If you buy the car, either by cash or by loan, after you apply for the mortgage they will be concerned because you are impacting directly numbers they are using to evaluate your financial health. I have experienced a delay because the buyer bought a car the week before closing. The biggest impact on your ability to get the loan is the greater than 20% down payment, Assuming you can still do that if you pay cash for the car.  Don't deplete your savings to get to the 50% down payment level. Keep money for closing costs, moving expenses, furnishing, plus other emergencies. Make it clear that you can easily cover the 20% level, and are willing to go higher to make the loan numbers work. I doubt it. If you have a good track record with your car loan, that will count for a lot more than the fact that you don't have it anymore. When you look for a house, your debt load will be lower without the car loan, which may help you get the mortgage you want. Just keep paying your credit card bills on time and your credit rating will improve month by month. Is it really worth the interest you'd pay over a year for a relatively minor and temporary bump to your credit score? I mean, you just bought a car so I'm assuming you probably aren't looking for another loan in the near future. "Generally it is not recommended that you do anything potentially short-term deleterious to your credit during the process of seeking a mortgage loan - such as opening a new account, closing old accounts, running up balances, or otherwise applying for any kind of loan (people often get carried away and apply for loans to cover furniture and appliances for the new home they haven't bought yet). You are usually OK to do things that have at least a short-term positive effect, like paying down debt. But refinancing - which would require applying for a non-home loan - is exactly the sort of hard-pull that can drop your credit rating. It is not generally advised. The exception to this is would be if you have an especially unusual situation with an existing loan (like your car), that is causing a deal-breaking situation with your home loan. This would for example be having a car payment so high that it violates maximum Debt-to-Income ratios (DTI). If your monthly debt payments are more than 43% of your monthly income, for instance, you will generally be unable to obtain a ""qualified mortgage"", and over 28-36% will disqualify you from some lenders and low-cost mortgage options. The reason this is unusual is that you would have to have a bizarrely terrible existing loan, which could somehow be refinanced without increasing your debt while simultaneously providing a monthly savings so dramatic that it would shift your DTI from ""unacceptable"" to ""acceptable"". It's possible, but most simple consumer loan refis just don't give that kind of savings. In most cases you should just ""sit tight"" and avoid any new loans or refinances while you seek a home purchase. If you want to be sure, you'll need to figure out your DTI ratio (which I recommend anyway) and see where you would be before and after a car refinance. If this would produce a big swing, maybe talk with some mortgage loan professionals who are familiar with lending criteria and ask for their opinion as to whether the change would be worth it. 9 times out of 10, you should wait until after your loan is closed and the home is yours before you try to refinance your car. However I would only warn you that if you think your house + car payment is too much for you to comfortably afford, I'd strongly recommend you seriously reconsider your budget, current car ownership, and house purchasing plans. You might find that after the house purchase the car refi isn't available either, or fine print means it wouldn't provide the savings you thought it would. Don't buy now hoping an uncertain cost-saving measure will work out later." Credit scores have a huge financial impact on consumers, even though most people don’t know how they are calculated or which bad habits may be driving theirs down. Your credit score is a number on a scale of 300 to 900 that can affect all of your financial decisions, from shopping for groceries to applying for a mortgage. Read on to find out why a good credit rating is so important. 4 Things to Know About Your Credit Score Why it’s important. Throughout your life, you will probably rely on your credit to acquire the items that you want and need but can’t necessarily pay cash for. Each time you buy something on credit, merchants are taking a gamble on you; the bet is Here's my take: 1) Having a car loan and paying it on time helps build credit. Not as much as having credit cards (and keeping them paid or carrying balance just enough to be reported and then paying it), but it counts. 2) Can't you set in your bank, not the lender, something to pay the car automagically for you? Then you will be paying it on time without having to think on it. 3) As others said, do read the fine print. There are several factors here. Firstly, there's opportunity cost, i.e. what you would get with the money elsewhere. If you have higher interest opportunities (investing, paying down debt) elsewhere, you could be paying that down instead. There's also domino effects: by reducing your liquid savings to or below the minimum, you can't move any of it into tax advantaged retirement accounts earning higher interest. Then there's the insurance costs. You are required to buy extra insurance to protect your lender. You should factor in the extra insurance you would buy vs the insurance required. Given that you can buy the car yourself, catastrophic insurance may not be necessary, or you may prefer a higher deductible than your lender will allow. If you're not sufficiently capitalized, you may need gap insurance to cover when your car depreciates faster than your loan is paid down. A 30 percent payment should be enough to not need it though. Finally, there's some value in having options. If you have the loan and the cash, you can likely pay it off without penalty. But it will be harder to get the loan if you don't finance it. Maybe you can take out a loan against the car later, but I haven't looked into the fees that might incur.  If it's any help, I'm in the last stretch of a 3 year car loan. At the time paying in cash wasn't an option, and having done it I recognize that it's more complicated than it seems. I have a few debts in collection. I do not care, I make very good money now, but I prefer to spend it on nice cars instead. In US after 7 years they do not affect your credit score. On the contrary, if you pay them they can ding your credit. That's what Susie Orman show says as well -- there is absolutely no point paying a debt that is more than 7 years old. You should not seek a kind of debt just for it's appearance on your credit report.  If you don't need an auto loan don't get an auto loan. Getting a credit card for the purpose of building credit is a little bit of a different animal because you can use a credit card such that you never pay any interest or fees.  With a loan, you will pay interest.  Altering your score by paying interest doesn't provide you with a net benefit. With that said, depending on the auto loan rate you may want to accept the loan just to fee up your capital.  Some promotional rates are so low you may even make money leaving the cash in a regular savings account.  But don't let your credit score wag the dog.