Question for people who understand credit scores (new car)

[hour]

So, I have about $13,000 left on my Tacoma before it's paid off... or another 40 months. Financed through Toyota Financial.

I'm not expecting to really save money in paying off, by my calculations the interest is already figured in to it and they're getting 'theirs' no matter what. I bought the truck in July of '12, got a big boy job a year and a half ago, and unexpectedly inherited some money (I've been basically paycheck to paycheck my entire life until big boy job).

Anyway, girlfriend's dad wants to buy my truck and I was considering paying off TFS for the purpose of securing the title ASAP and having it to give to him, though he's fine either way. Some googling has suggested that paying off a loan like this early, especially this early, could be pretty detrimental to my credit score, which has finally reached 'Excellent' - another first in my life. It's remained at excellent for about 4 months after I paid off a bunch of CC debt, but the last thing I want to do is pay off my truck all at once and take a big enough hit to bump me back down to 'Good', then get offered crappy interest rates when I go to buy a new vehicle, shortly after the sale of my truck.

Anyone have any experience with this kind of procedure? I'm fine with just buying a new vehicle tomorrow even while my credit score is A+ as my first payment on something new would surely be stalled a month or so, time enough for the Tacoma to be long gone... but not sure what the best move is here.

Thanks for input an reading my 2am poorly constructed post :rapture:

 

[KidVermicious]

This is just me talking, but your best move is to stop financing vehicles. If you can't pay cash for the truck you want, then drive something shitty and save your money until you can afford the truck you want. Or maybe you'll find that your $5000 shitty truck isn't as shitty as you thought, and you can spend that money you were saving for a blingy new ride on something that might mean more?

But my point is, you don't need a new truck so badly that you have to go into hock to buy it. Don't go into debt unless you absolutely have to, and a new truck to replace your three year old truck doesn't qualify as "have to".

 

[Kenworth]

If u pay it off early it won't hurt u at this pt,just get that lifted Minnie van?
First good job,then girl friend, then kids? Lol good luck

 

[hour]

KidV - I have a "$5000 shitty truck", which is actually my 3rd gen. And I love it (plus, it was closer to $3000). It's sticking around. I'm ditching my Tacoma because I got it two years ago (almost to the day) when I was making much less money, was single, declared myself bachelor for life, yadaya. All of that has changed.

The target vehicle is $50,500 - Ram Ecodiesel Crewcab 6'4 bed, about 3/4ths up the trim totem pole. Reason being is that I already bought a new truck and after two years it's not able to provide what I need now or moving on in to the future. Learning from my mistakes, I'm going to do it right and buy something I can hang on to for quite some time. Hell, I've even considered the fact that a double cab would be adequate for kids when they're young. I want to keep it past that, and we're not even married (but that's something I should get around to) so I'm going CrewCab. Yeah, I could pay off my Tacoma and buy the Ram in cash today. I sound like a dong saying that but the surprise inheritance coupled with working my dong in to the dirt for years, not just since getting the big boy job, has made this possible. I'm not going to buy a new vehicle in cash though because I'd like to buy a nice house next Spring and that's going to cost me dearly in this area. Sucks.

"Don't go into debt unless you absolutely have to, and a new truck to replace your three year old truck doesn't qualify as "have to"."

Hate to say it, but selling my 2012 leaves me with my 3rd gen, sitting at 250k miles. I know it'll run for some time to come, but it leaves some things to be desired. Will I fear putting my toddler in the back seat in a couple years to go to the store? No. Will I take the family across the country in it? Absolutely not. I'd have to get my spine fused after the first 1,000 miles :high5: It's a regular cab 4cyl 4x4 MT @ 5200ft, girlfriend can't drive it, it's awful on trips, and passengers have to sit on top of each other so totally unfriendly/unsafe to a future family.

Sorry to elaborate so much on that, but money is second to the issue of maintaining a good credit score, not only for the purchase of a better suited vehicle, but for home buying as well. Who wants to see their score drop 60 pts in the blink of an eye, in any event?

Kenworth - yes, that is the formula being followed. I'm 27 and dealt with state layoffs two years ago so now that I've recovered from that, started earning double, and have been with an amazing woman for nearly 2 years->Go time. I'm a little skeptical of your opening statement that it won't hurt, it surely seems like it most likely will according to mucho googling. This is paying off a loan 40 months before maturity date... Thanks to both of you for the input though.

 

[KidVermicious]

You've got a different definition of "need" than I do. If you want to tell yourself that you "need" a brand new 10,000 pound truck because you might have kids some day, and you "need" a nice house, more power to you I guess. I'm telling you I've been there and done that, and you don't "need" that shiny huge truck or that brand new oversize house as much as you think you do. You can get by with an older truck and an older house, and you'd probaby be a lot happier in the long run without the debt for those things you "need" hanging over your head.

As regards your credit score, I'll just say that if you were paying cash then all this worrying about your credit score would be irrelevant. If you've got a tasty windfall in your bank account, use it to buy as much house as you can afford, take what you would be paying in house payments and put it towards paying off the Taco early, and THEN sell it and buy your Ram Ecothingy. With cash. When you can afford it.

It's your money though, and you gotta do what you think is best. I hope things turn out as well as you're hoping they do.

 

[jediwebdude]

Early payoff does not affect your credit score in a negative way. Having a loan balance does, even a secured loan balance (e.g. car, boat), hurts it a little, but not much. Your current low balance may affect it by 1 or 2 points, so not much.

So the early payoff will eliminate the balance and your score may go up a bit. Of course, your score varies across the 3 reporting agencies.

 

[NOVA46]

Early payoff does not affect your credit score in a negative way. Having a loan balance does, even a secured loan balance (e.g. car, boat), hurts it a little, but not much. Your current low balance may affect it by 1 or 2 points, so not much.

So the early payoff will eliminate the balance and your score may go up a bit. Of course, your score varies across the 3 reporting agencies.

Yeah, as long as you're not missing payments your score won't suffer.

For example: I paid $7K down on my 4runner and financed $10 through my bank. However, I already had enough saved up when I purchased the vehicle and got my loan to buy the vehicle flat-out. Knowing this, I paid $250 over the principal every month, got it paid off in 1/2 time, and my credit score went up.

 

[hour]

Well, I certainly assumed my credit score would go up for doing this since my total debt->total credit ratio would be improved. But I've learned to not really assume much with credit scores and be extremely careful.

This is the link that got me the most worried last night if anyone cared to review:
Paying Off an Auto Loan Is Bad For Your Credit Score!? - Money Under 30

 

[philsey]

First, stop soliciting financial advice over the internet, and taking financial advice from bloggers like the link you posted above. Just stop. You've already gotten mixed opinions (opinion, not facts) plus two lectures from Kid.

Go to your bank or CU and talk to someone who knows what they're talking about. Credit scoring can be a cluster-f***.

Also, true credit scores are numbers, not letter grades. Your score is really good above 800 - what an "A" is I have no idea.

You are wise tho, to be concerned, and to be acting prudently to get your score up. It is more important than ever. Prospective employers even give it notice. As a landlord, I check prospective tenants, and weigh it, it's good business.

EDIT: How much CASH do you have in your emergency fund? Answer in terms of months it would last you on disability.

 

[jediwebdude]

To get the best financing rate avail, usually a score of 730 or higher is required. However, there is not a standard. If you are a member of a credit union, it is wise to get pre-approved through them as they are more member focused and thus will work to give you the best possible rate. Credit unions usually look at more than just your credit score to assess risk. With banks, it is usually black-and-white and there is no recourse to obtain a better rate.

 

[VoodooTitan]

I'm not a financial expert, but I have taken a few courses on finance and money management through the military. I'm a financial counselor to junior marines and sailors, but it mainly covers budgeting personal finances.

With that said, I agree with philsey. You're best bet is to talk to a legit advisor. What I do know is the following.

1. There are in fact different types of credit scores depending on what you're looking at. There's the FICO score which is the primary one when it comes to line of credit loans.

2. There are quite a few factors that effect your credit score. The major ones being the length of your credit history, if your payments are made on time, whether you have a mortgage or not, and debt to income ratio. For the most part, most creditors will view the ratios the same, meaning debt to income will account for 40% of your score, credit length 20%, etc.

3. Most credit institutions use a new type of interest called simple interest. Basically simple interest GUARANTEES the creditor will get their money up front before the principle is paid off. Meaning, lets say, over the course of a 5 year loan, the first year of payments, we'll say 40% of the monthly payment goes toward interest. Then the second year, 30% of the monthly payment goes to interest. This is why they suggest large payments be SPECIFIED "PAY TO PRINCIPLE".

4. The BIGGEST factors that will hurt your credit are late payments, typically 30 days late. The longer you're delinquent, the more it hurts your credit. Another thing that will "HURT" your credit multiple inquiries. That's why you should never apply to a bunch of credit cards or loans at once. That's also why it's super important to monitor your credit. I've heard in the past, dealerships having your credit run multiple times to lower your hard score to get you into a different credit tier.

5. Tiers... Credit groupings. Example... Tier 1 is 800-725. Tier 2 is 724-675. etc. Tier one people are usually your "well qualified buyers". They get the lowest interest rate, or the advertised "as low as" rate.

6. Paying off a loan early will not hurt your credit.

7. There are soft and hard credit hits. Soft hits are typically your "retail" credit cards. Sears. Best buy. Lowes. Etc... that's why those cards are good at helping build credit. allegedly.. Hard hits are auto loans, personal loans, major credit cards, home loans or mortgages. Hard hits lower your score LONG TERM. This typically takes a few months for the score to go back up A FEW POINTS. Soft hits lower your score for a short period of time. Something like 2 weeks. Remember, a few points can mean the difference of tier 1 to tier 2, tier 2 to tier 3. Also, remember the lower the tier, THE MORE MONEY you'll be spending because the higher the interest. Remember the saying "the rich stay rich while to poor get poorer"...

With that said, I suggest you sign up for monthly credit monitoring. You should always be well equipped and be an informed buyer. Why let the dealership tell you your credit score when you can know it yourself. If the dealership tells you you qualify for 10% interest and that's the best they can get you, and you sign and agree to that loan, you're locked in.

Equifax, Experian, and trans union are the primary credit agencies. Equifax offers a GREAT credit monitoring program online. If you're a member with a credit union they sometimes will offer credit monitoring through one of these companies. I have USAA credit monitoring through Experian. I get 1 free updated credit report per month, and unlimited on demand credit scores.

The benefit of this is... go buy a vehicle. You know your tier 1 and you can get that 0.5% interest rate for 36 months. You have your credit score on hand, and you are only authorizing them to check your credit once to confirm the score. Knowing your credit score can also help you negotiate better interest rates on credit cards and personal loans. Have a high credit card interest rate? Got good credit? Call them and ask them if they'll lower your interest rate since you're a loyal customer, made payments on time, and have a good credit score. They'll consider it and most likely do it.

Remember, if you sell your almost paid off Tacoma, you're going to end up with a whole new set of payments for a minimum of 24 months. That's money out of the pocket. When asked, most people will say the best thing they've done is paid off their vehicle. Being payment free is a huge thing. Once you own that car note, you have something of value you own.

 

[VoodooTitan]

To get the best financing rate avail, usually a score of 730 or higher is required. However, there is not a standard. If you are a member of a credit union, it is wise to get pre-approved through them as they are more member focused and thus will work to give you the best possible rate. Credit unions usually look at more than just your credit score to assess risk. With banks, it is usually black-and-white and there is no recourse to obtain a better rate.

One of the reasons credit unions are so helpful is because all the money the credit unions have are based on the members. Also another reason joe-shmoe can't walk in off the street and get a loan, he has to be a member. This vs you walking into bank of America and opening an account. They will take anyone. Credit Unions also tend to give better returns on interest for savings accounts. You typically have to be a "member" of a credit union to qualify for their benefits. Some credit unions like Navy Federal Credit Union and USAA are exclusive to certain demographics only, reason being is because they are selective on the members, and who they in turn loan money to.

 

[VoodooTitan]

KidV - I have a "$5000 shitty truck", which is actually my 3rd gen. And I love it (plus, it was closer to $3000). It's sticking around. I'm ditching my Tacoma because I got it two years ago (almost to the day) when I was making much less money, was single, declared myself bachelor for life, yadaya. All of that has changed.

The target vehicle is $50,500 - Ram Ecodiesel Crewcab 6'4 bed, about 3/4ths up the trim totem pole. Reason being is that I already bought a new truck and after two years it's not able to provide what I need now or moving on in to the future. Learning from my mistakes, I'm going to do it right and buy something I can hang on to for quite some time. Hell, I've even considered the fact that a double cab would be adequate for kids when they're young. I want to keep it past that, and we're not even married (but that's something I should get around to) so I'm going CrewCab. Yeah, I could pay off my Tacoma and buy the Ram in cash today. I sound like a dong saying that but the surprise inheritance coupled with working my dong in to the dirt for years, not just since getting the big boy job, has made this possible. I'm not going to buy a new vehicle in cash though because I'd like to buy a nice house next Spring and that's going to cost me dearly in this area. Sucks.

"Don't go into debt unless you absolutely have to, and a new truck to replace your three year old truck doesn't qualify as "have to"."

Hate to say it, but selling my 2012 leaves me with my 3rd gen, sitting at 250k miles. I know it'll run for some time to come, but it leaves some things to be desired. Will I fear putting my toddler in the back seat in a couple years to go to the store? No. Will I take the family across the country in it? Absolutely not. I'd have to get my spine fused after the first 1,000 miles :high5: It's a regular cab 4cyl 4x4 MT @ 5200ft, girlfriend can't drive it, it's awful on trips, and passengers have to sit on top of each other so totally unfriendly/unsafe to a future family.

Sorry to elaborate so much on that, but money is second to the issue of maintaining a good credit score, not only for the purchase of a better suited vehicle, but for home buying as well. Who wants to see their score drop 60 pts in the blink of an eye, in any event?

Kenworth - yes, that is the formula being followed. I'm 27 and dealt with state layoffs two years ago so now that I've recovered from that, started earning double, and have been with an amazing woman for nearly 2 years->Go time. I'm a little skeptical of your opening statement that it won't hurt, it surely seems like it most likely will according to mucho googling. This is paying off a loan 40 months before maturity date... Thanks to both of you for the input though.

Sorry for the multiple posts... I'm actually helping a marine with a financial situation too. I just read this post. Why not consider a Tundra? Reason being is you're with Toyota financial. I've been a customer with VW/Audi finance for like... 8 years. They typically give me the lowest rate every time because I'm a loyal buyer. I currently have 0.9% on my Golf-R. Something to consider. Toyota will give you a better value on a trade in too because they're able to do the maintenance and whatever is required to re-sell your Tacoma. I'm just saying, more food for thought.

 

[Brique]

We live in the most heavily marketed-to culture in the history of humankind, and of all the products available to us, debt is, by far the most aggressively marketed. It is, therefore, no surprise that over the last twenty or so years, our society has come to worship debt, to accept debt as a way of life, and to be hostile to the mere thought of living without debt.

When people refer to the “credit score”, they are most often talking about the FICO Score. It is produced by a company called Fair Issac Corporation. Credit reports are produced by three separate companies, but there is only one FICO. Now let’s consider the mystical, arcane and seemingly all-knowing FICO score for a moment. This little number has a great many people chasing their tails trying to raise it and making major life decisions based not on what is best for their long-term financial health, but on how they think it will affect their “credit score”. The FICO score is based on five factors: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New credit (10%) and Types of credit used (10%). The FICO score is based entirely on interaction with debt. Although other factors that have a tremendous impact on financial health are not a part of the FICO score (job history, career viability, net worth, change in net worth, purchasing and budgeting habits, personal character, etc.), it has been erroneously assumed by many to be an indicator of financial success. This fallacy has gone so far that now many employers, landlords and lenders consider a high FICO score a sure sign that someone is a “winner” and a low or nonexistent FICO a sign that someone is a “loser”.

To demonstrate the absurdity of this assumption, let us consider two examples. In the first example is a “normal” married couple with two car loans, four credit cards, a mortgage and $80,000 in student loan debt. This couple may have a credit score in the upper 700s, but may be one layoff away from utter financial collapse. In the second example, consider a multimillionaire couple who hasn’t borrowed money in over twenty years. With no debt interaction, they have no FICO score whatsoever, but are clearly in a much stronger financial position than the first couple.

While a low FICO score may indicate that a person is not on top of paying their bills, it may also mean that they simply don’t borrow much and are in fact in a stronger financial position than most, because instead of making payments every month, they actually have money. It’s ok for an employer or landlord to pull a credit score as part of due diligence, but a low score is only a sign that things need further investigation. An employer or landlord who chooses not to hire or rent based solely on a low or absent score without looking at the details of a credit report and actually talking to a candidate about their financial position is honestly not someone worth working for or renting from, as this is likely a symptom of other problems within their organization. To put it bluntly, if you accept a job or rental from someone who bases their decisions solely on a debt score, you will later wish you hadn't for other reasons.

There are a ton of myths surrounding credit, and they’re so numerous that I simply don’t have time to address them all here. The big one I will talk about is the “I need a high credit score to get a good rate on a mortgage” myth. Once upon a time, when someone wanted a mortgage, they would approach a lender, make an application, and the lender would look at that person or family’s overall financial position and ability to repay the prospective loan. This process was called “manual underwriting.” Unfortunately, as the industrial lending model developed, aided by computers and people with more smarts than sense, lending standards changed to a widget-based model, where people are reduced to numerical values, and anyone who doesn’t fit in the box is discarded as a reject. The flaws of this approach were made apparent back in 2007-2008 when a great many mortgage loans that had been underwritten based primarily on the strength of a FICO score went into default, causing in-part what many have taken to calling “The Great Recession.”

It has long been assumed by the culture-at-large that manual underwriting no longer exists, and that the only way to get a prime loan is to have a debt-worship score in the mid-700s. This is not true. Manual underwriting, while an endangered species, is not yet extinct and can be found, if one takes the time to look. It is true that most lenders will have no idea what you are talking about, and may even tell you that it doesn’t exist, but keep asking and you will find a lender that does it. To wit, my wife and I bought a house two years ago with no credit score at all on a mortgage at 3.75%. As of 2012, Churchill Mortgage and Wells Fargo both had manual underwriting programs, and I have no reason to believe that either of them have stopped.

Although I don’t have millions in federal grant money to waste on a research project, I have a pretty strong feeling that in many cases there is an inverse relationship between a person’s FICO score and their overall financial health. I feel this way because I used to be part of the “normal” crowd with a high credit score and a “healthy” level of debt. I’m not yet in that “multimillionaire” category, but currently our only debt is a small mortgage that we’re working on paying off early, and we are in a much better position now than when we had all the “normal” debts.

I’m not going to tell you what to do; you can make that decision for yourself. I can only tell you from experience that the paradigm you’ve been sold regarding debt is the same one I used to have, and I would urge you strongly to reexamine and to challenge what you’ve been told about it. My wife and I have been much happier since we did.

 

[VoodooTitan]

I'll bite and ask the question... what exactly did you do when it came to challenging and re examining? You seem to have a wealth of knowledge, how did you obtain it?

 

[Brique]

Hmm...I think the best way to answer that question will be to tell you my story, which is going to take a bit of a write-up. Let me work on that and get you a proper response.

 

[hour]

6. Paying off a loan early will not hurt your credit.

I guess this was the primary objective of the thread, hearing this from someone / multiple people who either have experience, or are rather knowledgeable in this area. Thanks though - jedi, voodoo, and brique for your responses. I'll have to review some of the longer posts when I get home.

First, stop soliciting financial advice over the internet, and taking financial advice from bloggers like the link you posted above. Just stop. You've already gotten mixed opinions (opinion, not facts) plus two lectures from Kid.

EDIT: How much CASH do you have in your emergency fund? Answer in terms of months it would last you on disability.

10-4, but I didn't expect to get a straight forward / definitive answer walking in to a bank and speaking to a specialist. More so "it shouldn't affect your credit score negatively". As far as emergency fund, with rent, current Tacoma payments, and all food/utilities, about 5 years. I'm not sure why you asked, but I'm not afraid to roughly double my car payment in order to buy a new vehicle. I've been making ~$350/mo payments on vehicles for almost 8 years solid. Would it be nice to have zero vehicle payment? Sure. But I'd prefer actually getting in to a long term vehicle ASAP as opposed to continuing to make these payments on a vehicle I know isn't suitable for much longer. I've put like 1,000 miles on it since November.

Again, this is pretty far off from my original goal with this thread. I guess providing backstory didn't help at all in this case.

Oh yeah, as far as the Tundra goes - nothing Toyota does presently impresses me, at all. I was considering a new 4runner but opted to skip the redundancy of owning two. Fuel economy is a huge selling point here and the Tundra is leaps and bounds behind the other guys.

 

[Slow]

I would not worry paying off the vehicle. If it where a revolving credit line like a credit card i would not close it ( i keep all mine open even though i do not use any but 1 to show utilization) I would not hesitate to close an auto loan as long as your credit is well established it should have minimal if any impact. there are so many variables to your credit score it is hard to give one straight answer.

Now when you go to buy your new car you will have a hard credit check and obviously more debt which will affect your score but that can also be minimal. I believe when i bought our 4R (Paid cash but still had to do a credit check) the hard pull dropped my score from 810 to 808 you could figure another 10-30 points for the purchase depending on your current debt ratio. It will bounce back pretty quickly though.

IMO and experience having a robust revolving credit line with minimal utilization (Dont keep a zero balance but don't charge em up) can mitigate any auto loan hit.

So If your credit is up to snuff do it. You could also join something like credit karma by trans union and use their simulators and it can give you a pretty good idea of how an auto loan will impact your credit score and the hit is usually allot less than what it estimates.

It really annoys me when the life nazi's say you should not buy a car unless you can pay cash. if you can afford the monthly and get a low rate then why the hell not.

 

[VoodooTitan]

[MENTION=101600]hour[/MENTION] you're safe to buy a new vehicle as long as you can hack it. Typically people who have some financial guidance wisdom will always ask about savings. Not to guage how mich money you have, but to understand the trend you set when it comes to money. People who are volatile spenders typically live paycheck to paycheck, have expensive taste, and tend to "live in the now". When taking on a huge payment the question should always be asked, how long can you survive without steady income, in terms of months. This is to ascertain if someone will default on their loans.

I always advise my marines and sailors that intend on separating from the military to save up at least 6 months of paychecks. This way, with their currwnt debt and spending habits, when they are released into the free world, without a job or anyone in yheir corner, they have the bankroll to survive while they reestablish themselves.
[MENTION=107195]Slow[/MENTION] I think those "life nazis" just have a different understanding of money. It something they were probably told while growing up so its what they preach. Its by no means wrong or poor advice. I would never suggest someone get into a loan if they didnt have guaranteed job security. On another note, lets say you did buy a car cash... typically theres no warranty on used cars thay the average american can "pay cash" for. So, esentially there is always going to be a bill to foot. Maintenance. Part replacement. Upgrades. Theres always going to be something. Paying a car cash isnt all its cracked up to be.
[MENTION=100310]Brique[/MENTION] I'd be interested. Maybe a new thread, it'd male a good read.

 

[johnzendrac16]

national credit union administration

Interesting post! Credit union is a great idea for those with shaky credit scores. I started banking about a year ago. I've been happy with their customer service and locations around town. Besides, fewer individuals trust the banks nowadays, after the economy went in the toilet and then they turned on their customers with fees. Consequently, numerous people started ditching the banking industrial complicated for credit unions and community banks. Credit union membership hit an all-time high and 2011 and continued to increase over 2012.