Will Paying Off My Car Loan Increase My Credit Score?

You have made your final car payment. The title is in your hand, and that monthly bill is finally gone. But then you check your credit score and notice something unexpected: it went down, not up. 

If you are wondering whether paying off your car loan will increase your credit score, the answer is more nuanced than you might expect.

For many borrowers, especially those building credit for the first time or establishing a U.S. credit history, understanding how car loans affect credit scores is essential. The reality is that paying off an auto loan can actually cause a temporary dip in your score, even though eliminating debt is generally a positive financial move. 

Let's break down exactly what happens to your credit when you pay off your car, why your score might drop, and what you can do about it.

The impact of paying off a car loan on your credit score

To understand how paying off a car loan affects your credit, you first need to know what factors make up your credit score. FICO scores, which are the most widely used credit scores in the U.S., are calculated using five main components: 

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%).

When you close an auto loan by paying it off, several of these factors can shift, sometimes in ways that temporarily lower your score. This does not mean paying off debt is bad. It simply means the credit scoring system rewards active, well-managed accounts more than closed ones.

Does paying off a car loan help credit?

Yes, but not always immediately. 

Does paying off a car loan help your credit over time? 

Absolutely. 

The on-time payments you made throughout the life of the loan remain on your credit report for up to 10 years, continuing to positively influence your payment history.

The short-term picture, however, can look different. 

When you pay off the loan, you close an active account, which can reduce the average age of your open accounts and affect your credit mix. If your auto loan was your only installment loan, you would lose diversity in your credit profile, which scoring models view as a slight negative.

What happens after I pay off my car loan?

What happens when you pay off your car extends beyond just your credit score. There are several practical and financial considerations to keep in mind once that final payment clears.

Your account status changes

Once you make your final payment, the loan moves from "open" to "closed" on your credit report. While closed accounts in good standing remain on your report for up to 10 years, active accounts carry more weight in credit scoring models. Credit bureaus and lenders want to see that you can manage ongoing credit responsibly, which is why open accounts with low balances tend to boost scores more than closed, paid-off accounts.

Your credit mix may decrease

Credit mix refers to the variety of credit types you hold, such as credit cards (revolving credit), mortgages, student loans, and auto loans (installment credit). If your car loan was your only installment loan, paying it off reduces the diversity of your credit portfolio. Scoring models favor borrowers who demonstrate they can handle multiple types of credit, so losing this diversity can cause a slight score decrease.

Your average account age could drop

Length of credit history matters. Closing an older account can lower the average age of your remaining open accounts, which may negatively affect your score. This impact is more significant for borrowers with thin credit files or those who are newer to the U.S. credit system. If you only have a few accounts, every closed loan has a larger proportional effect.

You receive your car title

On the practical side, paying off your loan means you now fully own your vehicle. The lender will release the lien and send you the title, which you may need to register with your state's DMV. Owning your car outright also gives you flexibility: you can sell it whenever you want, and you may be able to reduce your auto insurance coverage since you are no longer required to carry comprehensive and collision coverage by a lender.

Your debt-to-income ratio improves

While not directly part of your credit score, your debt-to-income (DTI) ratio is something lenders consider when you apply for new credit, especially mortgages. By eliminating your car payment, you lower your total monthly debt obligations, which can make you a more attractive borrower for future loans. If you are planning to buy a home, paying off your car loan before applying for a mortgage can help you qualify for a better mortgage rate.

What to do if your credit score dropped after paying off your car

If your paid-off car loan credit score dropped, do not panic. This is a common experience, and the dip is usually temporary. Here’s what to do next:

Keep your other accounts in good standing

The most important factor in your credit score is payment history. Continue making on-time payments on your credit cards, student loans, or any other accounts you have.

Maintain low credit card balances

Your credit utilization ratio, which is how much of your available credit you are using, accounts for 30% of your score. Aim to keep your credit card balances below 30% of your limits, and ideally below 10%. Now that you are not making a car payment, you may have extra funds to pay down credit card debt, which can offset any score drop from closing the auto loan.

Avoid opening too many new accounts at once

Each time you apply for new credit, a hard inquiry appears on your credit report, which can temporarily lower your score. If your score already dropped from paying off your car loan, adding multiple hard inquiries on top of that can compound the decrease. Be strategic about when and how often you apply for new credit.

Consider keeping old credit cards open

Since you just closed an account by paying off your loan, avoid closing any old credit cards, even if you do not use them regularly. Keeping them open helps maintain your credit history length and your total available credit, both of which support your score. Just make sure there are no annual fees eating into your finances.

Give it time

Typically, any initial dip recovers within a few months as long as you continue practicing good credit habits. Credit scores are dynamic and constantly recalculated based on your activity. Stay patient and consistent, and your score should rebound.

How Lendbuzz can help

If you have a thin credit file, no U.S. credit history, or are working to rebuild your credit after paying off a previous loan, Lendbuzz evaluates more than just your credit score.

Using advanced AI and alternative data, Lendbuzz looks at your complete financial picture, including your income, savings, education, and employment history, to determine your ability to repay. 

This means you can get approved based on your actual financial situation, not just a nine-digit number. 

Plus, making on-time payments on a Lendbuzz loan helps you continue building your U.S. credit history.

Ready to explore your options? Apply in minutes at and see what rates you qualify for.

Will paying off my car loan increase my credit score? Key takeaways

Here is what to remember:

Paying off your car loan can cause a temporary credit score dip due to changes in your credit mix, account status, and average credit age. The on-time payments you made during the loan remain on your credit report for up to 10 years, continuing to benefit your credit history.

Will paying off a car improve credit long-term? Yes, by lowering your debt-to-income ratio and demonstrating responsible borrowing behavior.

If your score drops, focus on maintaining low credit card balances, making on-time payments on other accounts, and avoiding unnecessary new credit applications.

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