VIVA Personal Finance Blog

Will paying off loans improve my credit score?

Updated: Aug 17

Making on-time payments on an installment loan will definitely improve your credit score! There's a small catch, though: the actual event of paying off your loan will have a negative affect on your credit.

Why?

It comes down to credit diversity, which is a key component to how your credit score is calculated. Having many diverse types of credit available to you is good for your credit score, but when you pay off a loan it is effectively closing the loan account, which reduces the diversity of your overall credit mix.

However if you've been making on-time payments on the loan, the overall effect on your score will be positive. So even though you'll see a dip from paying off and closing the loan account, your credit score should be better off in the long run.

Still curious how this all works? You can read more about credit mix, types of loans, and what goes into calculating your credit score in our Personal Finance Blog!

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