How does paying a loan off early affect your credit score?

July 29, 2007 9:26 PM

How does paying a loan off early affect your credit score? I would assume that it would make your score higher. Also I applied for a capital one personal loan. I have a credit score above 750 and reported income of 100k + w/ very little expenses. The rate they offered me was 12.99 which is the highest available from their lowest available of 6.99. What gives, I figure I should prove to be a fairly safe investment.
posted by mi6op to Work & Money (8 answers total)

Capital One makes most of its money being the lender of last resort, so I can't imagine they would be offering competitive loan rates. Maybe there's more to your situation, but as it is, I wouldn't be expecting a low rate on a loan of any sort from them unless there was something in the fine print that made it hyperprofitable for them.
posted by missouri_lawyer at 9:31 PM on July 29, 2007

While paying off a loan early does not negatively affect your credit, lenders do not like losing loans early. They may feel that you are likely to pay it off early and want to get as much out of you as they can while you are there.
posted by B(oYo)BIES at 9:46 PM on July 29, 2007

And I would assume paying off early wouldn't lower your score, other than the immediate effect of carrying less debt in toto. I've rolled plenty of debts from one institution to another, so paying off early really just indicates I know how to lick a stamp . . .

Capital One is truly one of the scummier operations out there so it doesn't surprise me you're not getting their bait rate.

btw, TMK ~750 isn't that great a credit score. Just average for non-fuck ups. 800+ is the threshold for actual sterling credit.
posted by Heywood Mogroot at 10:58 PM on July 29, 2007

Oddly enough, paying off a loan early isn't considered a good thing by lenders. It means they lose interest income from you.

It's not a bad thing, either, but it isn't better than paying off the loan on schedule. There's no rating boost for paying off a loan early.

Any loan without collateral is considered to be riskier than one with collateral, and a higher interest rate will be charged to offset that risk.

It's also a simple market situation: they don't need to offer a lower interest rate because they think you'll take the loan at a higher rate.
posted by Steven C. Den Beste at 11:20 PM on July 29, 2007 [2 favorites]

An absence of expenses isn't really a factor in credit reporting. What lenders want to see is that OTHER lenders are taking a chance on you, and you're paying them regularly. Getting one loan, in other words, often makes it easier to get another.

This may explain the prevailing economic climate of our times. :)
posted by rokusan at 2:36 AM on July 30, 2007

I personally doubt they've decided you're a bad risk because you paid off a loan early (like some above suggest). But if it was, say, a student loan, I don't think you get much of a bump from paying it off (I might be wrong here). If you already had pretty low debt, especially credit card debt, then it's understandable you wouldn't go up much. I also disagree with Heywood Mogroot in that I think >750 is a good score, and that part of what it takes to get over 800 is just having decades of history on some accounts. I might be wrong here, but that's what I heard.
posted by salvia at 6:20 AM on July 30, 2007

Unsecured personal loans generally have the highest interest rates. I assume you've checked your credit report recently to see if there have been any changes. If not, do so. There could've been negative information recently.

The size of the loan also could have something to do with it.
posted by electroboy at 6:50 AM on July 30, 2007

This might not work with a personal loan, but you might consider calling them and asking for a lower rate. Capital One was my first credit card and once or twice a year I call and ask if I can get a lower rate. They almost always lower it for me.

Like I said, they may not do that on personal loans, but they worst they'll say is that they can't do it.
posted by chndrcks at 7:01 AM on July 30, 2007