Can Paying Off Loans Temporarily Decrease My Credit Score?

Question:

I want to buy my first home one year from now. I currently have a 770 credit score, and will put 5% down payment when the time comes. I think my chances are pretty high of being approved for a mortgage based on this and my monthly salary.

My question is, if I were to pay my car loan off in the next six months, will it hurt my FICO score? I’ve read articles and heard from people saying this has happened to them, but when I apply for a home loan I don’t want my debt to income ratio to reflect both my student loan as well as my $300 car payment.

Answer:

There are a lot of other factors that contribute to your credit score, but paying off your car loan should not materially lower your FICO score. Sometimes in these situations, there can be a temporary dip, but nothing that would affect a borrower with a 770 score.

Also, if you have less than 10 months of car payments remaining, you’re lender can exclude that car payment when it comes to calculating your debt-to-income. So you don’t need to let this auto loan delay your home buying or mortgage approval.

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