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Dealership worker doles out bad information about credit scores: Money Matters

January 2, 2019

Dealership worker doles out bad information about credit scores: Money Matters

Q: I can’t imagine you haven’t already covered this, but while car shopping the finance manager at the dealer mentioned that both paying off a loan early or even paying off credit card debt fully every month can hurt one’s credit score. Are the creditors in cahoots with the credit agencies looking for ways to encourage us in be more in debt? Is this accurate and if so why?

G.L., Vermilion

A: This kind of nonsense really scorches my skillet.

No, it’s not true. If you pay off a loan early or pay off your credit card debt, it will not hurt your credit score. It will help your credit score.

The person who told you this is either incredibly ignorant or was flat out lying. I won’t try to analyze what negative motive the person might have had. Your speculation may not be off the mark, though. They’re all in this debt/ lack-of-transparency thing together.

If you pay off a car loan or mortgage or another installment loan, this helps your score because it shows fulfillment of an obligation that you’ve probably had for years. You keep your word.

If you pay off credit card debt in full every month, it shows you know how to live within your means and don’t charge more than you can pay. And if you pay on time, it shows you’re reliable.

In addition, if you pay your credit card debt in full every month, it keeps your ratio of debt-to-credit-limit low. Your credit score will still reflect some debt, because any statement balance shows as debt until you pay it.

All of these help your credit report.

The only scenario where paying off an installment loan could hurt your credit score -- and I’m sure this is not what the finance manager was talking about -- is if you have no other active loans or credit cards and you stop using credit completely. If you go a few years without a loan or using a credit card (and then paying it off in full), then your credit score can suffer because you won’t have any recent track record for creditors to evaluate.

So by all means, pay off your car loan as long as there’s no prepayment penalty and as long as you have no other, more expensive debt. And by all means, pay off your credit card debt in full every month. That’s the best way to manage your money and your credit score.

Murray is The Plain Dealer’s personal-finance writer. Because of the volume of requests, she cannot help everyone who contacts her.

To reach her: moneymatters@plaind.com

On Facebook: MurrayMoneyMatters

On Twitter: @teresamurray

Previous columns online: cleveland.com/moneymatters

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