Paying off a loan is a liberating feeling. But even though you’re finished with a loan when you make your last payment, that doesn’t mean the loan is finished with you.
As it turns out, borrowed money makes a mark — good or bad — that can take years to disappear.
Your credit report lists new and old accounts
First, it’s important to remember what your credit report is and what kind of information it contains.
Your credit report is a detailed document that lists information about your history with handling borrowed money. You have three credit reports — one from each of the major credit bureaus — and the bureaus get the data about your credit accounts from your lenders. That data is used to calculate your credit scores, which are then used to make lending decisions.
In addition to personal information, like your name and address, your reports list both positive and negative information about how you manage credit. (The reports can look daunting; here’s our guide to how to read them.) For instance, if you always pay your auto loan on time, it will be listed as an account in good standing. On the other hand, if you’ve defaulted on a credit card, this will be noted, too.
It’s a common misconception that your credit report includes only information about your active accounts. This isn’t true — in fact, unless you have a very limited credit history, your credit report is probably full of data about loans and credit cards you paid off years ago.
This is because banks, employers and other entities that might pull your credit report like to see a long track record of how you’ve treated your credit accounts. Just looking at how you’re doing right now doesn’t provide a complete picture. In reviewing information about both past and present accounts, they’re able to make more informed decisions. The more evidence they have that you’re a responsible borrower, the better.
A paid-off loan won’t drop off overnight
All this means a paid-off loan won’t drop off overnight. But how long should you expect it to stick around?
The answer depends on how you handled the account. If it was closed because you defaulted, that information will stay on your credit report for as long as seven years. The same goes for delinquencies, foreclosures, short sales and most other negative information. The only black mark that can stick around longer is a Chapter 7 bankruptcy, which will remain on your credit report for up to 10 years.
But if you paid an account on time and in full every month — meaning it carries positive information — it will remain on your credit report for up to 10 years from the time it was closed. If an account with positive information is paid off but remains open, say a credit card or line of credit, it will stay on your credit report indefinitely. Be aware an issuer might close an account because of inactivity, so if you want the positive information to stick around think about occasionally using that card.
Assuming that the loan you’ve recently repaid was in good standing, it’s actually a good thing that it didn’t drop off your credit report as soon as you made your final payment. You’ll continue to get “credit” for it for years to come.
Good credit tips to live by
Since credit behaviors can follow you around for years, you’re probably wondering what you can do to keep your credit reports (and, consequently, your credit scores) looking sharp. Here are a few pointers:
- Pay your bills on time, every time.
- Keep the balances on your credit cards low. A good rule of thumb is to avoid exceeding 30% of your available credit on any card, at any time during the month.
- Start using credit responsibly as soon as you can.
- Only apply for credit you actually need.
- Check your credit reports for accuracy at least once per year. If you spot a error, take steps to have it corrected.
This article was updated Aug. 5, 2016. It originally published Sept. 19, 2014.