{"id":8659,"date":"2021-04-29T08:00:00","date_gmt":"2021-04-29T14:00:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=8659"},"modified":"2024-05-06T14:09:54","modified_gmt":"2024-05-06T20:09:54","slug":"dos-and-donts-of-paying-off-debt-early","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/credit-101\/dos-and-donts-of-paying-off-debt-early.html","title":{"rendered":"Do\u2019s and don\u2019ts of paying off debt early"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law\u2019s editorial disclosure for more information.<\/a><\/em><\/p>\n\n\n\n

The word \u201cdebt\u201d usually has a negative connotation. Whether it\u2019s student loans, lines of credit, consumer debt or a mortgage, most people strive to pay it off as early as possible. However, there are smart decisions to be made when paying off debt.<\/a> For example, many people wonder, \u201cDoes paying off a loan early hurt credit?\u201d This guide takes you through all the do\u2019s and don\u2019ts of paying off debt early so you can make the right decisions for your financial health.<\/p>\n\n\n\n

What are the benefits of paying off debt early?<\/h2>\n\n\n\n

There are several appealing reasons why you might want to pay off your debt early.<\/p>\n\n\n\n

You can save money<\/h3>\n\n\n\n

When it comes to debt, what can really get you is the interest rates.<\/a> Luckily, if you pay off a debt earlier, you\u2019re reducing the total interest you pay.<\/p>\n\n\n\n

Let\u2019s say you have a credit card balance of $5,000 at an average credit card interest rate of 16 percent<\/a>. If you\u2019re making a monthly payment of $200, it will take you 31 months to pay off the debt, and you\u2019ll have paid a total of $1,122 in interest.<\/p>\n\n\n\n

Now, if you increase your payment, it can make a significant overall difference. By doubling your monthly payment to $400, you will more than double the impact on interest and total loan time. Your time to pay off the debt will decrease to 14 months, and your total interest paid will be $506.<\/p>\n\n\n\n

You can protect your credit<\/h3>\n\n\n\n

If your debt is something like a loan, then paying it off early can protect your credit. You will no longer be in danger of damaging your credit with a late or missing payment. Either of these instances can typically lower your credit score by 90 \u2013 110<\/a> points for several months.<\/p>\n\n\n\n

Additionally, paying off your debt can help your debt-to-income ratio. Your credit score is made up of five factors<\/a>, and the debt-to-income ratio accounts for approximately 30 percent of your credit score.<\/p>\n\n\n\n

Potential negative consequences<\/h2>\n\n\n\n

You might be surprised to learn that there are some potentially negative consequences to paying off debt early as well.<\/p>\n\n\n\n

Prepayment penalty fees<\/h3>\n\n\n\n

It\u2019s essential to read the fine print of your debt before you start paying it off early. Some creditors choose to protect themselves from individuals trying to pay off debt early by including penalty fees. For example, many mortgages put a cap on how much extra you can contribute to your mortgage loan every year. Usually, it\u2019s up to 20 percent of your principal balance<\/a> annually.<\/p>\n\n\n\n

Find out if your loan has a prepayment penalty fee, and calculate whether this fee is greater than the interest left on your loan. If your interest is lower than the penalty fee, it\u2019s really not worth paying off the loan early.<\/p>\n\n\n\n

Changes to credit factors<\/h3>\n\n\n\n

So, does paying off a loan early hurt your credit? The answer is, sometimes it can. For example, installment loans are different from revolving debt. Installment loans, such as mortgages, have a fixed interest rate for a period of time and fixed payments. Revolving debt, such as credit card debt, usually has high interest rates and options for minimum payments.<\/p>\n\n\n\n

Keeping installment loans open can help your credit by improving your credit diversity. Additionally, installment loans show the credit scoring companies that you can reliably pay a loan. On the other hand, credit card debt, unless you\u2019re paying it off entirely every month, can do more harm than good to your credit score.<\/p>\n\n\n\n

However, this doesn\u2019t necessarily mean that paying off a loan will hurt your credit score\u2014you just shouldn\u2019t expect it to automatically help, either. Your credit score may not change at all, or it may shift in either direction by just a few points.<\/p>\n\n\n\n

Paying off debt: Do\u2019s and Don\u2019ts<\/h2>\n\n\n\n

Do address monthly expenses first<\/h3>\n\n\n\n

Your debt shouldn\u2019t take priority over your monthly fixed expenses. Payments such as your rent, utilities and food are necessities. You need to pay these to continue living safely and comfortably.<\/p>\n\n\n\n

Don\u2019t neglect your savings<\/h3>\n\n\n\n

It\u2019s crucial to have savings, especially emergency savings. Make sure you have an emergency fund at a level you\u2019re comfortable with. That way, if something urgent comes up, like the loss of a job or a medical bill, you will be able to survive without falling into more debt. People without emergency funds often find themselves turning to desperate solutions (such as payday loans), which are usually more harmful in the long run.<\/p>\n\n\n\n

Do consider refinancing<\/h3>\n\n\n\n

If the balance of your installment debt is incredibly high, it might be time to consider refinancing. This route is usually a great option if you\u2019ve been making regular payments and have seen an improvement in your credit score. A better credit score may mean you qualify for better rates with refinancing, which can save you thousands of dollars in interest.<\/p>\n\n\n\n

Talk to a financial planner first to better understand if refinancing is the best option for you.<\/p>\n\n\n\n

Don\u2019t discount investment opportunities<\/h3>\n\n\n\n

It can be tempting to prioritize debt above all else, including retirement. Don\u2019t discount investment opportunities, though. Just as you should have an emergency fund, it can hurt you long term  if you don\u2019t begin saving for retirement<\/a> now.<\/p>\n\n\n\n

Additionally, consider the interest rates on your debt. The average return on investments in the stock market is, historically, around 10 percent<\/a>. If the interest on your debt is lower than 10 percent, investing might be a better option than paying debt off early.<\/p>\n\n\n\n

Do consult a professional<\/h3>\n\n\n\n

The right balance of debt can actually help your overall credit. However, it\u2019s all quite complicated, and there are a lot of different factors to take in. It\u2019s vital to consult a finance professional before making any significant decisions. <\/p>\n\n\n\n

Paying off your debt sooner than necessary isn\u2019t quite the straightforward process it might seem to be. There are many factors to consider, and it\u2019s important to be thoughtful before making any decisions. You can also reach out to our team at Lexington Law<\/a> today to learn more about your credit.<\/p>\n\n\n\n

Note:<\/em><\/strong><\/a> Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Does paying off a loan early hurt credit? Doing this may seem like a good idea, but it can impact you in ways you may not be aware of. Learn more here.<\/p>\n","protected":false},"author":63,"featured_media":14959,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[114,367,398,317],"yoast_head":"\nDo\u2019s and Dont's of Paying Off Debt Early - Lexington Law<\/title>\n<meta name=\"description\" content=\"Does paying off a loan early hurt credit? Doing this may seem like a good idea, but it can impact you in ways you may not be aware of. 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