You’ve made all your installment loan payments on time every month with the goal of closing out the debt. You’ve even made budget sacrifices to pay extra toward the loan’s principal to shorten the life of the loan. You may be proud of paying off a loan early, but a review of your credit score may surprise you.

Paying your credit cards down quickly may be good for your credit score, but an installment loan doesn’t work in the same way. It’s even possible that your score could take a dip once the loan is paid in full. If you’re going without certain necessities to redirect the money saved toward your loan payment, don’t do it for your credit history. There are other advantages to paying a loan off early, but a credit score boost isn’t one of them.

Impacts of Paying Off a Loan

There’s a big difference between credit card debt and loan debt. A credit card is a revolving loan. Even after you pay the balance in full, your account remains open for use until the next time you need to charge a purchase. An installment loan is set up to include a certain number of payments over time. Once you pay the loan off, your obligation is fulfilled and the loan account closes.

Here’s what usually happens when you pay off your loan:

Paying off a loan early can save you money on interest. The savings may be substantial enough to make it worth your while to pay the balance off faster than scheduled. Plus, you’ll have a chunk of money available every month for other things once you’re done with the loan. Make sure your lender won’t penalize you with an early payment penalty for speeding up your payments.

Once your loan is paid off, the account is closed. Your credit report will show that the loan was “paid in full” — unless you didn’t make all the payments. A paid-in-full account may or may not affect your credit score, depending on how many other credit accounts you have open, if your payments were on time and how long you made payments for.

It’s important to make your loan payments on time. Your lender will report late payments to the credit bureaus, which will remain on your credit report for quite a while. Late or delinquent loan payments show on your credit report for seven years, and they are most likely to affect your credit since payment history accounts for 35% of your credit score.

If loan payments were on time and the account closed in good standing, it could remain on your credit report longer than seven years. You may notice that a negative report on your credit is erased from your credit history faster than a positive one — the credit bureaus want to give you the opportunity to build on your credit history successes to improve your credit score.

As mentioned, paying your loan off early may not improve your credit score as you’d expect. It’s all too easy to take out a loan, pay it back in a couple of installments and benefit from the account closure. The credit bureaus and creditors like to see a long history of consistent, on-time payments. Paying your loan off early isn’t a bad thing, but you’re more likely to be rewarded for making all the agreed-to payments since credit age is one of the factors the credit bureaus use to rate your creditworthiness.

Your credit score may drop after your loan is paid off and closed. The credit bureaus award consumers who have a mix of credit products, including loans, lines of credit and credit cards. The more credit products you can manage, the more you may be perceived as financially responsible by the credit bureaus. If your only revolving loan is paid off and closed, it may negatively affect your credit score because your credit account mix drops.

Is it worth paying off a loan early?

Paying off a loan early is a personal financial decision. If you’re doing it just for the boost in your credit score, you may be disappointed with the results. Look at the number of payments you have left and how much interest you will pay. You may feel motivated to pay off the loan faster after examining the numbers.

To speed up your loan payoff, make extra payments every month, even if they’re small. You’ll have to decide for yourself how much you can afford and what you can go without in your budget. The money you save in interest charges may make it worth your while to cut back on your expenses in the short term and pay off your loan sooner.

Building a credit history is a fluid process. You’ll experience credit score highs and lows as accounts open and close, credit inquiries are made for other credit applications, or if you make the mistake of forgetting to make a payment on time. Although seeing your hard-earned credit drop, it may be temporary so, focus on the big picture. Improving your credit score is all about making correct and consistent decisions on your journey toward financial independence.