Q&A: Paying Off Debt In Full

Dear Liz: In January, I used financing to buy a used car, and now I have about $8,000 left to pay off. I recently received a windfall and can pay off that debt in full. Is there any reason to not go ahead and do that? This car loan is my only current debt. However, I do anticipate buying a home and thus getting a mortgage in the near future. Additionally, would paying off the car loan help lower my auto insurance payment?

Answer: Having an open installment loan showing on your credit reports can help your scores, according to credit expert Barry Paperno, who used to work for leading credit scoring firm FICO. But paying it off shouldn't hurt you much if at all. By contrast, paying off revolving debts such as credit card balances can give a real boost to your scores.

Paying off the loan should save you some interest and eliminating the payment could help you qualify for a bigger mortgage. Those are real advantages. Still, there may be better uses for your windfall. Are you taking full advantage of your 401(k) match, if your company offers one? If you don't have a workplace retirement plan, are you contributing to an IRA? Do you have an emergency fund?

A paid-off car doesn't automatically qualify for lower insurance rates. You can consider dropping collision and comprehensive coverage on older cars, since you're no longer required to carry that coverage, but make sure that you're comfortable with the risk of not getting anything from your own insurer to repair or replace your car if, for example, you cause an accident and your car is damaged.

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