We recently asked our social media audience this question and the responses were GREAT!

57% of our viewers voted “True” feeling  that paying off their loans early would help build their credit score, while 47% voted “False” paying off loans early did not help build a credit score.

Which answer is correct???

The correct answer is false.  It is a common misconception among consumers that making extra payments buys us favor with the credit bureaus, but this is not correct.  First, let’s explore why the credit bureaus exist.

Credit bureaus track our financial habits and keep a running tally on everyone’s fiscal health.  Since the same things are tracked for every individual, this levels the playing field for everyone.  The makeup of your score is:

• 35% on-time payments
• 30% how much you have paid down/how much credit you used
• 15% length of credit
• 10% new credit
• 10% different types of credit

Knowing that 50% of your score is how many consecutive, on-time payments you made, paying something off early actually cuts your history short.  In cases where loan fees are accessed per loan, refinancing or renewing can, not only raise the cost of building credit exponentially, but hinder your progress.

Put yourself in lenders shoes, if a stranger asked to borrow money from you it is likely you would decline due to the risk.  However, if that same stranger gave you two letters of reference proving he has been paying as agreed on other loans, you would be more likely to lend.  The same thing applies to any creditor.  No creditor can afford to lose, this is why they use due diligence to ensure your credit worthiness by reviewing your payment history.

If you want to know more about how to build your credit score, contact a credit counselor with the Citizen Potawatomi Community Development Corporation today. We would love to help you build credit and learn to thrive financially. (405)878-4697