subject: What Will Happen To Your Credit Score After Paying Off A Loan? [print this page] Problem: Problem:
I have taken out several payday loans in the last few years. I was facing a financial crisis and this compelled me to resort to payday loans. I was able to make payments on the payday loans for a few months. However, I lost my job in the first quarter of 2011. This is why it became more difficult for me to pay the bills.
I have secured a job after much difficulty. I am working in a library nowadays. The wage is not very high, but it is enough to run my family. I have received some money from my uncle. I have started making payments on some old debts. I want to pay off the payday loan also. Will my credit score increase once I pay off this loan? I am not interested in paying off the loan if my credit score will drop.
Scenario:
It is evident that you're very much concerned about your credit score. It is a good sign for you. However, I would like you to remember that good financial health help to maintain a good credit score. So, it is better to make the decision on the basis of your overall financial health rather than your credit score.
It is good that you have money to pay off your payday loan. Most of the people are not as fortunate as you. They don't have the requisite money in their savings account to pay off the high interest loan. As a result, they often approach the payday loan debt consolidation companies for getting debt assistance.
You're lucky to receive a windfall. Use it to pay off your payday loan. Keep in mind that you have some other debts too. You'll have to use a portion of the money to bring the other delinquent debts into the current status. If there are any charged-off or collection accounts, then you'll have to pay off these accounts too. Paying off outstanding credit card balances will also be beneficial for your score.
Remember that just paying off your payday loans will not make a miraculous change to your credit score. Combined or collective efforts will bring a positive change to your credit score. This means you'll have to stay current on all your debts on a regular basis.
The credit scoring models take the payment histories into consideration while calculating your credit score. So, you'll have to make payments on the loans as per the agreement.
Your credit score will not drop after paying off the payday loan. However, if you can keep the account open and manage it properly, then it will be even better for your credit score. The credit bureaus/scoring models will think that you're able to manage the accounts on your own. In short, it will show that you're a responsible borrower, and the credit scoring models love to award these people.
Finally, if you feel that it won't be possible for you to maintain the high interest payday loan in the long run, then it will be wise to pay it off.
