Car loans are helpful in many ways. They give you the opportunity to drive a new car every few years, they help you build credit, and they can be used as leverage when applying for other loans down the line. So you might be wondering how fast a car loan will raise your credit score.
Upon first getting your car loan, your credit score will decrease a few points. This is a result of the hard credit check performed, and your new loan is reported to various credit bureaus. After that, you should expect an improvement over two years with on-time payments.
What other ways can you bring your credit score back up? And are there any other effects a new car loan can have on your credit score? We have the answers, so join us as we share these essential details and more.
Do Auto Loans Increase Credit Score?
When it comes to car loans, your credit score plays an important role. On average, the higher your credit score is, the less you will have to pay for a monthly car loan. But the lower your credit score is, the more you will have to pay for a monthly car loan.
That's pretty common knowledge, but what about when you sign up for a car loan? Do you have anything to worry about? First, it's important to note that you shouldn't panic if you notice your credit score has dropped after you apply for a car loan. The truth is that this is completely normal, and it happens to everyone. When you apply for credit accounts or loans, a hard inquiry is made to your credit report.
This inquiry remains on your credit history for at least two years. It can also decrease your score, depending on how many inquiries you have already. Lenders may be more concerned if you have multiple inquiries than as they typically are over one or two points.
What's more, the impact on your credit score may not be as significant if you haven't applied for credit in some time. You want to make sure you get the best deal possible on your loan. Therefore, you should shop around to find the best interest rate for a new car.
Furthermore, you want to make sure to include all inquiries within two weeks. When you do this, the credit bureaus will consider it one hard inquiry. And as a result, it will significantly reduce the impact on your credit score.
Keep in mind that hard inquiries typically result in a small reduction to your overall score. The auto loan is considered new credit and therefore lowers your credit account's average age, which equals 15% of your FICO score.
If you have a new account with no payment history, it will negatively impact your credit score until you have consistent on-time payments. As you continue to make payments on your car loan, these temporary credit changes will begin to fade.
Knowing what kind of effect a new car loan has on your credit rating is only part of the equation. Does your score drop by one point? Five points? Ten points? More?
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How Many Points Does a Car Loan Raise Your Credit Score?
As we've learned thus far, a new car loan actually lowers your credit score due to the hard credit check performed to secure the loan. There are some disagreements when it comes to how many points are actually deducted from your credit rating at the time of the hard inquiry.
But in general, you should only notice a deduction of two points. Keep in mind that these two points can remain subtracted from your credit score for up to two years. The good news is that you can take action to bring your credit rating back up, and that includes making your payments on time, every time.
We'll look at some other ways you can help improve your credit score, but first, let's focus on your credit report, so you know what you're looking at when you examine it.
We know that your car loan will have some kind of impact on your credit score and credit report. As you look over your credit report, it can be a bit intimidating if you're not familiar with it.
You can view your auto financing by going to the reports page when you visit each of the major credit bureaus: TransUnion, Equifax, and Experian. Each of these credit bureaus lists your car loan account. Once there, you have two categories to choose from:
Types of Accounts
An installment account is used to report an auto loan. Student loans and mortgage loans are two other types of installment accounts. These are the same amount of payments but for a fixed number.
A portion of your credit score can be derived from "Credit Mix," so a car loan could help improve your credit score if you don't have an installment loan.
Your credit report will show that you are on track with your car payment payments. This is because your credit history is the most important factor in determining your credit score. If you are late 30 days or more, your lender could take your car and repossess it. This could lead to your credit being ruined.
Therefore, it is absolutely imperative that you strive to make timely payments every month according to your agreement. Failure to do so will only put you in a position to lower your credit rating.
It's always a good thing if you pay all your car loan payments on time. In doing so, your credit report will reflect as much. Also, don't hesitate to file a dispute if you find an error, such as an on-time payment being posted as late.
These things do happen from time to time, so it's important to regularly check your credit report and look for potential errors.
To ensure that all accounts are correctly reported, you can obtain free copies of your credit report every 12 months. There are numerous resources online that will let you review your credit report, so don't miss out on taking advantage of them.
More like this: Do Student Loans Affect Your Credit Score?
How You Can Improve Your Credit Score
A credit score consists of a three-digit number that rates the likelihood of whether you will pay back your debts. Moreover, credit scores start at 300 and go up to 850. Your score is used by lenders to evaluate how likely they will be repaid.
The higher your score, the lower your risk. But if you have a lower score, lenders think you are more likely to default on a loan. You want to do everything you can to keep your score up. In general, FICO scores above 720 are considered good credit, while scores below 620 may indicate an increased risk of future high credit utilization or inability to maintain minimum monthly payments.
Bottom line: Your credit score consists of a number that represents your creditworthiness. With a higher credit score, you can get better rates on loans and other types of financing. Whether you want to buy a home or get a mobile phone plan, you need good credit to help you achieve your goals in life.
It's important to know what factors go into calculating this number so you know what you can do to help improve it. There are five main categories that affect your credit score:
- Payment history (35%)
- Debt (30%)
- Credit utilization (10%)
- Credit history length (15%)
- Types of credit in use (10%)
The first step to improving your credit rating is to make sure you're paying all your bills on time and keeping up with all payments. If there are any accounts open in your name and you are not using them, make sure they're paid off.
This means closing any unused store cards or accounts not required by law if possible, as having too many open lines of credit can reduce your rating. Remember: One day past due or late payment can make a huge difference in your rating.
Furthermore, it's also important to keep balances low as a percentage of available limits on each card. This will also impact the rating negatively. The last factor is making sure you have a variety of accounts open such as those for gas, furniture, department stores, and the like.
Paying these on time will effectively increase the total amount available for borrowing and will help raise your credit rating. Therefore, you can help your credit score by doing the following:
- Check your report for any errors
- Paying your bills on time
- Open a line of credit
- Pay off debt
Moreover, if you don't already have a budget, making one will go a long way in helping you keep track of your spending.
The bottom line is that everyone's credit report is different. Therefore, there are various factors that can dictate the outcome of getting a car loan. In most cases, you will see your loan application points go back up after two years.
But as long as you make timely payments and you never miss a payment or make a late one, you should see improvements much sooner. But again, this depends on other factors of your credit report, which are unique to you.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.