You’re ready to buy the car that shows your character: something new, bold, and impressive. Or, maybe you’re looking for something more reliable to cart the kids to soccer. In either case, a car loan will affect your credit score unless you’re paying cash.
How much does a car loan affect your credit score? Potentially, a lot. There’s good news and bad news in that. The good news? It can contribute to your “credit mix” and, with on-time payments, help boost your credit score. The bad news? It’s still debt and could cause your credit score to dip, especially when applying for a new loan. Below are the steps you can take to optimize your score and buy that new car.
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Table of contents
How does shopping for a car loan affect your credit score?
First, the basic facts: shopping for a car loan will affect your credit score. Each time a lender runs a credit check, it will be considered a hard inquiry on your credit report. You will typically see a few points drop from your score. However, all the major credit bureaus count hard inquiries from auto lenders within a set time as one inquiry, you shouldn’t see a huge dip as long as you make all applications within a short time frame.
The length of time for all inquiries to count as one hard inquiry ranges from 14 days to 45 days. For example, if you apply for several auto loans within 14 days to compare offers, it will show up as a single hard inquiry.
How does taking out a car loan affect your credit score?
How does a car loan affect your credit score? A car loan will affect your credit score like any other type of credit.
The length of your credit history, payment history, and new credit line can all affect your credit score. Adding a new type of credit to your credit mix can increase your score in the long term. But taking out new debt, plus the hard inquiry, can cause a dip. Here’s an overview of how each element can affect your credit score for better or for worse.
Payment history
Payment history is the most important factor for your credit score. As long as you make all of your payments on time, taking out an auto loan affects credit scores by building credit history and payment history. On-time payments can help boost your credit score immensely.
Payment history is the single most important factor in whether a car loan will help boost or harm your credit score. A single late payment can stay on your credit history for seven years. In addition to hurting your credit score, paying a car loan more than 30 days late can cause a lender to repossess the car.
Credit usage
Credit usage is the amount of available credit that you are currently using. For example, if you have four credit cards, each with a $5,000 limit, your available credit is $20,000. An auto loan doesn’t increase your credit card limit and, as a type of installment loan, doesn’t directly impact your credit utilization ratio.
That said, it will increase your total debt. If your auto loan is $10,000 in total, then your total debt increases by $10,000, and your monthly debt payments will increase by the amount of your auto loan payment.
Length of credit history
Generally, the longer your total credit history, the more it will help your credit score. Try to keep your oldest credit account open when applying for an auto loan to avoid an additional drop in your credit score.
New credit
When you open a new line of credit, it can improve your credit utilization ratio. Over time, as you pay off your auto loan, you could see a boost in your credit score with improved available credit.
Credit mix
A diverse credit mix demonstrates to lenders that you use credit responsibly in different situations. Credit cards, mortgages, student loans, and auto loans are some of the most common types of credit that appear in credit mixes. Credit can be either installment, revolving, or open. Here is what falls into each category:
Revolving credit: Credit cards or store cards.
Installment credit is used for mortgages, auto loans, student loans, personal loans, and other loans with set repayment terms and fixed amounts.
Open credit: Electrical bills and other monthly bills that vary in amount.
Many consumers only have one or two types of credit, such as a credit card and student loans. Car loans can work well in your favor as an installment credit, improving your credit mix.
Having installment, open, and revolving forms of credit can help improve your credit score as long as you pay all bills on time.
How much will a car loan drop my credit score?
Car loan impact on credit score varies by consumer and personal credit history. For most people, when you take a new car loan, your credit score may dip slightly.
This is largely due to a hard inquiry on your credit report and should be temporary. Over time, a car loan may actually help your credit if you pay bills on time each month.
Will a car loan help my credit?
Practicing smart credit habits will help improve your score over time, even with a car loan. The key is to pay on time every month. With regular on-time loan payments, an auto loan can help improve your credit score.
An auto loan can contribute to your credit score by adding to your payment history, new credit, and credit mix. As you pay off the loan, your credit utilization and payment history may continue to improve, leading to a credit score boost. If your auto lender doesn’t have an early repayment fee, consider paying it off faster and clearing the debt (while saving on interest).
Should You Get a Car Loan?
Most people will get an auto loan to buy a car that costs $10k to $20k. But do you need a newer car? Not necessarily. You could also consider getting a cheaper car and paying in cash. If you get an auto loan, remember to apply to multiple lenders within two weeks, so it appears on your credit report as a hard inquiry. To help boost your credit score, make sure to pay on time or set up automatic payments. Long-term, responsible car loan repayment could help you boost your credit score.
FAQs
How fast will a car loan raise my credit score?
Usually, a car loan will lower your credit score with a hard inquiry before it raises your credit score. There’s no set time frame for how long it takes a car loan to improve your credit score, but you can expect to see your score improve after making consistent on-time monthly payments. Keep in mind that credit scores are determined by credit bureaus and on-time payments history is only one of the many factors considered.
Do car payments build credit?
Yes, over time, on-time car payments can help you build a positive credit history. You can set up automatic payments to avoid the risk of late payments.
Does a car loan affect credit utilization?
No, a car loan, as a type of installment debt, does not affect your credit utilization ratio. However, it will affect your debt-to-income ratio and total debt.
How many times can I run my credit for a car?
You can run your credit for a car as often as you want. It’s a good idea to compare offers from multiple lenders. Try to compare all offers within 14 days so it counts as a single hard inquiry on your credit reports.
Does having two car loans hurt your credit?
Having two car loans might temporarily hurt your credit score, depending on other factors such as your total income, total debt, and loan amounts. If you have two car loans, paying both loans on time each month is essential to build a positive credit history over time.
Does paying off a car loan early hurt your credit score?
Paying off a car loan early shouldn’t hurt your credit score long-term if you practice responsible credit habits. However, if your credit mix changes, it could cause a temporary dip in your credit score under certain scoring models.
Does having good credit lower car payments?
A good credit score can help you qualify for a lower interest rate and, in turn, lower monthly car payments. However, it is essential to shop around for rates before settling on a lender to get the best available terms is essential.
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