Your credit score will be impacted by getting a car loan, but it’s hard to say how much. This is due to the fact that auto loans have the potential to add both positive and negative information to the mix of various factors that determine credit scores.
After taking out a car loan, most borrowers can expect to see a decline in their credit score. However, by making on-time payments and lowering their loan balance, they can recover those lost points—and more.
So, you’re thinking about buying a car. Congratulations! A new car can be a fantastic way to get around town, explore new places, and enjoy the freedom of the open road. But before you head to the dealership, you might be wondering: will buying a car affect my credit score?
The answer, like most things in life, is: it depends
The short answer is that buying a car can potentially help or hurt your credit score, It all comes down to how you manage your loan and how well you take care of your credit in general
The long answer is a bit more complicated. Let’s dive into the details and explore how buying a car can impact your credit score, both positively and negatively.
How Buying a Car Can Positively Affect Your Credit Score
Here are a few ways buying a car can give your credit score a boost:
- Making on-time payments: Your payment history is the most important factor in your credit score, making up 35% of your FICO® Score. So, by making all your car loan payments on time, you’re demonstrating responsible credit behavior and building a positive track record. This can lead to a gradual increase in your credit score over time.
- Diversifying your credit mix: Your credit mix, which accounts for 10% of your FICO® Score, refers to the different types of credit you have. Having a mix of installment loans (like car loans) and revolving credit (like credit cards) shows lenders that you can handle various types of credit responsibly. Adding a car loan to your credit portfolio can help improve your credit mix and potentially boost your score.
- Building a longer credit history: The length of your credit history also plays a role in your credit score, making up 15% of your FICO® Score. The longer your credit history, the better. By taking out a car loan and making consistent payments, you’re adding to your credit history and potentially improving your score.
How Buying a Car Can Negatively Affect Your Credit Score
Although purchasing a car can improve your credit score, there are a few possible drawbacks to be mindful of:
- Hard inquiries: When you apply for a car loan, the lender will likely perform a hard inquiry on your credit report. This inquiry can temporarily lower your credit score by a few points. However, the impact is usually short-lived, and your score should recover quickly if you maintain good credit habits.
- Missing payments: This is a big one. If you miss even one car loan payment, it can significantly damage your credit score. Late payments stay on your credit report for up to seven years, making it harder to qualify for future loans and potentially leading to higher interest rates.
- Defaulting on the loan: In the worst-case scenario, if you default on your car loan, the lender may repossess your car and report the default to the credit bureaus. This can have a devastating impact on your credit score, making it extremely difficult to borrow money in the future.
Additional Factors to Consider
When thinking about how purchasing a car will effect your finances, bear in mind the following additional factors in addition to the direct impact on your credit score:
- The cost of the car: Obviously, the price of the car you buy will have a significant impact on your monthly payments and overall debt. Make sure you can comfortably afford the car payments before taking on a loan.
- The interest rate: The interest rate on your car loan will also affect your monthly payments and the total amount you’ll pay for the car over time. Shop around for the best interest rate before you commit to a loan.
- The length of the loan: The longer the loan term, the lower your monthly payments will be. However, you’ll also end up paying more interest over the life of the loan. Choose a loan term that fits your budget and allows you to pay off the car in a reasonable amount of time.
Tips for Protecting Your Credit Score When Buying a Car
The following are some steps you can take to lessen the harm that purchasing an automobile will do to your credit score:
- Shop around for the best interest rate. Don’t just accept the first loan offer you receive. Compare rates from multiple lenders to find the best deal.
- Make sure you can afford the monthly payments. Before you take out a loan, create a budget and make sure you can comfortably afford the monthly payments.
- Make all your payments on time. This is the most important thing you can do to protect your credit score. Even one late payment can have a negative impact.
- Consider a shorter loan term. This will help you pay off the loan faster and reduce the total amount of interest you pay.
- Monitor your credit score regularly. This will help you stay on top of any changes to your credit score and identify any potential problems early on.
The Bottom Line
Buying a car can be a great way to improve your credit score, but it’s important to do it responsibly. By making smart choices and managing your loan carefully, you can turn your car purchase into a positive step towards a healthier financial future.
Does applying for a car loan hurt your credit score?
Shopping around for a car loan can potentially impact your credit score. This is due to the fact that your credit score may decrease by one to five points each time you apply for a loan and have a hard credit check.
Fortunately, there are ways to avoid major credit damage. One way is to look for lenders who offer car loan preapproval. You can view an interest rate quote after being preapproved for a loan without the lender pulling your credit. In other words, your credit score won’t be affected.
Applying for all of your auto loans within a 14-day “rate-shopping window” is another technique to preserve your credit score. ” When you make multiple applications within this time frame, FICO only counts them as one.
What affects my credit score?
Taking on a car loan can affect your credit score in a few different ways. Here’s what’ll change as a result of a new auto loan:
- Payment history: The primary factor influencing your credit score (35%), is your track record of timely debt payments. You can accumulate your car loan balance if you make the minimum payment required each billing cycle, or stay current on your payments.
- Credit utilization: The amount of debt you owe accounts for thirty percent of your FICO credit score. Your credit score will suffer if you take out a new loan, but you can raise it by paying off your auto loan balance.
- Length of credit history: The average length of your credit history accounts for 15% of your credit score; the longer you’ve had credit cards and loans, the better. Your average length of account history is likely to decrease when you take out a new car loan, but over the course of your loan, you can improve in this area.
- Credit mix: A minor portion (10%) of your credit score examines the various credit accounts and loans you currently possess. If you don’t currently have any loans outstanding, particularly any auto loans, getting one can raise your credit score.
- New credit: Since opening new accounts reflects financial uncertainty, getting a new loan or credit card can lower your credit score. Yes, new accounts alone account for 10% of your FICO score; however, when you apply for new auto loans, your score may decrease slightly.
When you go car shopping, reviewing your credit reports and score can help put you in a better position to qualify for a loan with a lower interest rate. You can get reports for free from all three credit bureaus at AnnualCreditReport. com. Credit monitoring will also help you see what changes happen after you take out the loan.
There’s no set time frame for how long it takes a car loan to improve your credit score. After purchasing a car, you should anticipate an improvement in your credit score as long as you pay off your loan balance and make on-time monthly payments.
Paying off a car loan early can impact your credit in a couple of ways. You can lose points if that account is your only active loan. However, you’re likely to have a bigger, positive impact from eliminating the debt. An even greater benefit will result from paying off other debts with the money you have freed up after paying off your auto loan.
Every car loan application can potentially cost your credit score a few points. But, you can prevent losing points by applying for auto loans only during a 14-day window and obtaining preapprovals before applying (without a hard credit pull).
How a Car Loan Affects Credit Score – Auto loans raise or lower scores? How fast? How many points?
FAQ
Does buying a car increase your credit score?
How much does buying a car hit your credit?
How fast does a car loan build credit?
Why did my credit score go up after buying a car?
Does buying a car affect your credit?
And with car prices at all-time highs, most car buyers have little choice but to use financing. If you plan on buying a car with an auto loan, it could affect your credit positively or negatively depending on whether you make payments on time and repay the loan in full as agreed. How Much Does Your Credit Score Drop After Buying a Car?
How does a car loan affect your credit?
The impacts of a car loan start with the first inquiry on your credit score. The car loan remains on your credit for the life of the loan plus another 10 years. If you have a five-year car loan, for example, the loan will affect your credit for a total of 15 years.
Can I buy a car if my credit score is bad?
The lower your credit score, the lower your chances of you being able to buy a car. If your credit score needs a lot of work, it may be hard to find a lender who will approve you for a car loan. If you’re not able to qualify for an auto loan on your own, you may need to find a co-signer with better credit.
Can a car loan raise your credit score?
If you want to raise your credit score by 100 points in 30 days, you shouldn’t rush to buy a car with a loan. If you do, your credit score will probably be lower after 30 days. As discussed above, however, the loan will help your credit over time as long as you always pay by the due date.