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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion of redlining and its effects on the racial wealth gap.
Then we pivot to this week’s question from an unnamed listener, who texted: “I'm starting a master's program in the fall. And I have two years left on my car loan with a 3.24% interest rate. Because I have income now and I won't once I start school again, I'm thinking about paying off my car loan before starting. There's no penalty for paying off my car loan early. Should I be worried that paying off my car loan early will negatively affect my credit history? I want to take out a mortgage in a few years.”
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Paying off a loan early will definitely free you of a monthly obligation, but it’s not always the best financial decision. , but that’s not the reason we suggest thinking twice.
Before deciding to pay off a debt early, think about your overall financial picture. Even as graduate school leaves you without an income, life may still deliver unexpected expenses. Consider whether putting money toward an early payoff would leave you without an adequate emergency fund and safety net.
If your credit score is in the , the loss of a few points is unlikely to affect whether your credit score will be when you are ready. But if you’re trying to build your credit, you may want to hang on to the loan because making those payments on time beefs up your credit history.
If you have a loan or credit card — or both — and consistently pay on time and use just a fraction of your credit card limits during graduate school, your credit score will .
Know what factors influence your credit scores. Closing an installment account might lower your score a bit. But overall, building a history of on-time payments across all accounts is more important.
Balance the effect on your scores with your goals. Your scores shouldn't be the only factor you consider. Think about overall financial health, including having an emergency fund.
Put your scores in perspective. Losing a few points is not a big deal, especially if you have a good or excellent credit score.
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