A car loan can be a powerful tool for building your credit score. However it’s important to understand how car loans impact your credit and how long it takes to see a boost.
How Car Loans Affect Your Credit Score
When you take out a car loan, the lender will report your payment history to the credit bureaus. This information is used to calculate your credit score, which is a numerical representation of your creditworthiness.
Keeping up with your car loan payments on time will improve your credit score. This is because it demonstrates that you are a trustworthy borrower who is capable of paying back your debts. Payment history is actually the most significant factor influencing your credit score, making up 30.5 percent of the total score.
However, there are other factors that can affect your credit score when you take out a car loan. These include:
- Hard inquiries: When you apply for a car loan, the lender will perform a hard inquiry on your credit report. This can temporarily lower your credit score by a few points. However, the impact of hard inquiries is relatively small and usually disappears within a few months.
- Credit utilization: Your credit utilization ratio is the amount of credit you are using compared to your total available credit. Taking out a car loan will increase your credit utilization, which can lower your credit score. However, as long as you keep your credit utilization below 30%, the impact on your score will be minimal.
- Length of credit history: The length of your credit history is another important factor in your credit score. Taking out a car loan will add to your credit history, which can help to improve your score over time.
How Long Does it Take for a Car Loan to Boost Your Credit Score?
The amount of time it takes for a car loan to boost your credit score will vary depending on your individual credit situation. However, you can expect to see an improvement in your score within 60 to 120 days of making your first on-time payment.
Here are some factors that can affect how quickly your credit score improves after taking out a car loan:
- Your credit score before taking out the loan: If you have a low credit score to begin with, it will take longer to see a significant improvement.
- The amount of the loan: The larger the loan amount, the greater the impact it will have on your credit utilization ratio. This can slow down the rate at which your credit score improves.
- Your payment history: Making on-time payments is the most important thing you can do to improve your credit score. If you miss even one payment, it can set you back significantly.
Tips for Maximizing Your Credit Score with a Car Loan
Here are a few tips to help you maximize your credit score with a car loan:
- Make all of your payments on time. This is the most important thing you can do to improve your credit score.
- Keep your credit utilization low. Aim to keep your credit utilization below 30%.
- Pay off your loan early. This will shorten the length of your loan and help you build credit faster.
- Monitor your credit report regularly. Make sure there are no errors on your credit report that could be dragging down your score.
Getting a car loan is one of the best ways to raise your credit rating. But it’s crucial to comprehend how auto loans affect your credit and how long it takes to see an improvement. You can optimize the favorable effect of a vehicle loan on your credit score by heeding the advice provided above.
Frequently Asked Questions
How much does a car loan boost your credit score?
The amount that a car loan will boost your credit score depends on your individual credit situation. However, you can expect to see an improvement in your score within 60 to 120 days of making your first on-time payment.
How long does it take for a car loan to show up on my credit report?
A car loan may not appear on your credit report for up to 30 days.
What happens to my credit score if I miss a car loan payment?
Missing a car loan payment can have a negative impact on your credit score. The severity of the impact will depend on how late the payment is and how often you miss payments.
Can I get a car loan with bad credit?
Yes, it is possible to get a car loan with bad credit. But you might have to put down more money or pay a higher interest rate.
What is the best way to build my credit score?
Making all of your payments on time, maintaining a low credit utilization rate, and paying off your debts as soon as you can are the best ways to raise your credit score.
Length of credit history
This is essentially the age of your credit. It considers:
- How long your credit accounts have been open
- The age of your oldest account
- The age of your youngest account
- The average age of all accounts
- The age of specific account types
- How long it’s been since you used your accounts
An older credit history can impact your credit score for the better.
This variable looks at how many revolving debts — credit cards, lines of credit, retail store cards, etc. — you have relative to your installment debt. Installment debt includes most fixed-term loans, like student loans, car loans, mortgages, etc. The goal is to have a fairly even mix of the types of credit.
This variable looks at:
- How many new accounts you have
- How many recent hard credit inquiries you’ve had
- When was the last time you created a new account?
A lot of new credit can hurt your credit score.
Your FICO credit score is determined by a number of factors, but in as little as 60 to 120 days, your auto loan may begin to improve your score. But remember, everyone’s credit situation is different, so your results may vary.
Taking on a hard credit inquiry
The lender will perform a hard inquiry on your credit profile to approve you for a car loan. These hard inquiries negatively impact your new credit variable, which can temporarily drop your credit score.
Fortunately, FICO only considers hard credit checks performed in the last 12 months when calculating your credit score, and after 12 months, that inquiry no longer impacts credit score.