Does Paying Off a Loan Increase a Credit Score?

Paying off a loan can help your credit score improve if you don't neglect higher-interest debt in the process.

It will Improve a Credit Score

Paying off debt is almost always a good idea. Paying the full balance on a loan -- whether it be a car loan, personal loan or mortgage -- will not only help you establish a credit history, it can also increase your credit score, according to MyFico.com.

It Can Lower Your Score

Finance author Liz Pulliam Weston warns people not to pay off a loan in full if it means neglecting higher-interest debt, such as credit cards. Credit scores are based on a person's overall payment history and total amount of debt. Paying off higher-interest debt first will increase your credit score more in the long run.

Bottom Line

Take a look at your overall debt when determining whether or not to pay off a loan in full. Target the debt with the highest interest to get best results. If you have little debt to consider, paying a loan in full will certainly give your credit score a boost.

References

• MyFICO.com: Four Ways to Improve Your Credit
• MSN Finance: When Paying off Debt is a Bad Idea