How Will a Car Loan Impact my Credit Score?
Taking out a car loan can result in a temporary dip in your credit score, but this drop can be recovered easily as long as you take the right steps.
Written by Claire Beaney
Reviewed by Jessica Barrett
Regardless of the type of loan, financing a vehicle will result in a slight drop in your credit score. Fortunately, this is only temporary and easily recoverable.
Most credit scoring systems allow you to shop for the best car loans without your credit score taking a major hit. Once you secure a loan your score will dip, but you can boost your credit score up again as long as you are making your payments fully and on time.
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Read on to learn more about how a car loan will impact your credit score.
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How applying for an auto loan will impact your credit score
When you first apply for a
car loan
, the lender with whom you apply will complete a credit check as a hard inquiry on your credit report. A hard inquiry can temporarily reduce your credit score anywhere between 5-15 points. If you qualify and get approved for a loan, you’ll see another small dip in your credit score as you take on the new debt.Fortunately, these dips are temporary. As long as you make payments promptly, your credit score should bounce back.
The good news is that your credit utilization should not be impacted. Your credit utilization is the amount of revolving debt that you carry every month relative to your credit limits. For example, if you have a credit card with a limit of $2,000 and you have spent $1,000, for example, then your credit utilization is 50%.
While credit utilization accounts for 30% of your credit score, it is only impacted by revolving credit accounts (i.e. a credit card). Auto loans are not calculated into credit utilization and won’t impact this part of your credit.
How an auto loan can help your credit score
Despite the temporary dip from your initial loan agreement, an auto loan can help your credit in the long run.
A new auto loan can help improve your credit mix, which makes up 10% of your credit score. Lenders see that you can responsibly handle different types of credit and will look at you more positively when you are applying for your next loan.
The simple act of making your payments on time can also show financial responsibility and help improve your credit score. Additionally, you may want to
pay off your loan faster
to improve your credit, but make sure there aren’t any prepayment penalties
written into your loan agreement.MORE: What is a good credit score for a car loan?
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How an auto loan can hurt your credit score
While proper management of an auto loan can increase your credit score over time, taking out an auto loan will always have a negative impact on your credit score because it will increase your overall debt.
Furthermore, if you miss payments, your auto loan is considered delinquent. If a full billing cycle passes and you can’t make a payment, your inability to pay will be reported to your credit bureau—this can lead to some major credit damage.
Numerous missed payments might make you
default on your loan
, which could again leave a negative mark on your credit score and even lead to repossession.Key Takeaway If you make auto loan payments on time, you might see your credit score increase. However, mismanagement of your loan will cause problems for your credit in the long run.
How to find affordable car insurance
The financial impact of taking a car loan out can be detrimental, so finding other ways to
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, the Jerry
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MORE: The best car insurance for bad credit drivers
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FAQs
How can I find my credit score?
There are a few ways that you can get a hold of your credit scores, which you will need to take out a car loan.
First, you can check your credit card statements, loan statements, or with your financial institution, as many companies have started to provide customers with their credit scores.
Additionally, you can purchase your credit scores correctly from one of the three major credit bureaus in the US—Equifax, Experian, and TransUnion. There might be other providers in your area that can also supply copies of your credit score.
Some credit score services or credit scoring sites offer free copies of credit scores to their users. Others might require you to pay a monthly subscription fee to help with monitoring your credit.
How can I improve my credit score to help with auto financing?
There are many methods for you to improve your credit score when it comes time for an auto loan.
Here are a few tips to improve your credit score:
Review your credit reports to get an understanding of what financial decisions may be helping and hurting you
Pay your debts on time
Aim for a credit utilization of 30% or under
Limit how often you request new credit inquiries
Keep old accounts open as lenders favor older credit
Consider consolidating your debts
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