finance charges on auto payment

[badcreditsucks]

Hello all. I was considering paying off my auto loan ($21k never late, loan ends in May 2005, owe $5k), however it was brought to my attention that I should continue to make regular payments, as it will help my credit scores. My question is, due to the fact that I actually have the money to pay it off right now, would it be a good idea to send in all but the last payment, and then in May pay it off as scheduled. Wouldn't that cut some of the interest or at the very least I would only be paying interest on one month's payment versus 7 months. Would I have to specify that a portion of the money is to be applied towards the principle and/or interest? This is very confusing to me, so any help would be greatly appreciated. Thank you in advance for your help.

[Ravenous Wolf]

First of all, you have to understand that there are two issues involved, credit management and debt management. And both of those are totally different with completely different goals. Doing well in one area hurts the other area.

Credit management has nothing to do with wise and sound debt management.

A large portion of your credit score is based on LONG credit histories and responsible credit behavior. The Fair Isaac corporation doesn’t care how smart or wise you are in managing your debt. The FICO scores are only concerned on how you manage your credit.

Years ago, I thought I was doing the right thing by paying off a few installment loans early but loan officers then wanted to know why I had such “short” credit histories. Credit wise, you will shoot yourself in the foot if you pay low interest loans off early.

High interest loans, you need to get rid of them as soon as possible.

As you can see, the goal of credit management is totally different. It wants you to have LONG credit histories so that you can beef up your credit score.

The goal of debt management is to minimize as much of your debt as possible so that you can keep as much of your cash in your pocket and build that into an asset instead of a liability.

For someone that is young, that is in their 20’s and 30’s, they really need to purse credit management as vigorously as possible. For people in their 40’s or older who already now have LONG credit histories, like a mortgage paid off or almost paid off, credit cards 10 or 15 years, old, etc, then credit management goals are likely to have already been established with long credit histories and responsible credit behavior. At that point, it is extremely wise to pursue a vigorous debt management strategy in order to eliminate debt so that an older person will have assets instead of liabilities (especially when preparing for retirement).

[badcreditsucks]

Thanks for the reply. However, the account in question was opened almost five years ago and the last payment is due in May 2005. My question was should I go ahead and send a large payment in now, towards the principle, and then make the last payment to them in May? The payment history would still be the same as far as length and benefit to my credit score is concerned. The interest rate on this loan is 11.5% and the original amount of the loan was $21,900 ($485/mo payment).

[WillyB]

After five years it would seem the loan and aged plenty. If you paid every thing except the last payment, and paid it in May 2005 you would be paying 11.5% for approximately 6 months. On a balance of $485 you are talking about less than $5 per month. I personally would keep the 25 - 30 $ and pay the loan off.

[Ravenous Wolf]

Well, I misunderstood your original post.

Five years is definitely good age for the length of an installment note. You definitely ought to pay it off right away...

[badcreditsucks]

Thanks everyone!!