If an insurance company reimburses a car because of an accident, will my credit score go down or up? | Finance
By: Leigh Thompson
Automobile owners with comprehensive insurance are covered in the event of an accident. Totalized vehicles are refunded when you owe less than the value of the car. It is difficult to assess the total effect of prepaying an auto loan on your credit score. When you reduce your total usage rate, your score may increase. When you close an open account, your score may decrease. Either way, having a positive business line on your credit report increases your long term credit score.
Your credit score is generated based on a number of factors including your payment history, length of account history, number of accounts opened, number of inquiries, negative accounts, and total utilization rate. When you change any of these items on your report, your score may go up or down. Prepaying an auto loan affects your number of open accounts and your total usage rate.
Closing open accounts
According to Experian, an open account with an active payment history positively influences your credit score more than a closed account. When you pay off your loan, you may experience a decrease in your credit score due to the change in account status. The account does not disappear from your report. Equifax reports that positive trade lines remain on your report for a period of 10 years from the date of last activity.
Your credit score takes your current balance and divides it by your available credit limits. High balances over your credit limit have a negative effect on your credit score. When you pay off your car loan, you reduce the total amount owed on your balances, thus lowering your utilization rate. In theory, paying off this debt could increase your credit score. It depends on your level of use. Consumers with maxed out credit lines may see their score increase, while those with lower debt amounts may not notice a difference.
If your car has run out, you may be forced to buy a new car. Opening a new car loan can have a negative effect on your credit score. Additional auto loan inquiries might affect your score – although multiple auto loan applications within a 30-day period will count as one for your score generation. Plus, opening a new line of credit temporarily lowers your credit score until you generate a payment history.
Biography of the writer
Leigh Thompson started writing in 2007 and specializes in creating content for websites. It has been published online in various capacities. Thompson holds an associate’s degree in information technology from the University of Kansas and is working towards a bachelor’s degree in business and personal finance.