How Does Paying Off a Loan Affect Your Credit Score?

A credit score plays a vital role in building your financial image. This means that if you keep a good credit score, your credibility in the market increases. A good credit score helps you take the best payday loans easily in the future, as based on your credit score, the lender is sure that you will repay the loan amount on time. Each of us therefore, works towards building our credit scores. The most common strategy that we all try and apply in order to build our credit score is by paying off our credit card debt. If we have a large balance pending on our credit card, it is a good idea to pay it off and boost our credit score. This strategy however is not applicable for other types of loans. The credit score for a home loan or a car loan works differently. Prepaying such loans might seem to be boosting your credit score initially but in reality you are actually making yourself less credit-worthy.

Difference between a credit card repayment and a home loan prepayment

A credit card is a revolving account which means that you can keep paying your dues and making fresh purchases. The account stays open and the balance is revolved month on month. If you have a zero balance in your credit card account, it will seek you a high credit limit and hence will boost your credit score.

A revolving account (for credit cards) works very differently as compared to an installment loan account(a home loan, student loan etc).An installment loan is a process where you keep paying a part of your borrowed amount each month in the form of installments.

Prepaying your total loan amount at once brings an end to this process and does not earn you any credit score. In fact if you keep the installments going till the end date, you will definitely gain from it by scoring a good credit on the basis of your timely payments. Another reason why you should think before closing your installment account is that the number of accounts that you maintain with balances helps to build your credit score as your timely payments show a positive picture of you as a borrower. Closing an installment account means ending the account then and there. In fact if you maintain different types of loans like home loan, car loan, credit cards and study loan at the same time, it will widen your portfolio. This again will reflect positively on your credit history as you are capable of managing various types of credits well. The lenders would be ever willing to offer best payday loans bases your excellent credit score.

It is therefore clear that a prepayment of any installment loan although relieves you of an extra burden but in no way does it do any good to your credit score. For those who are overburdened with their debts should definitely lessen their burden by bringing down the number of loans on their head but at the same time should keep in mind that doing so should not affect their credit score negatively.