Buying a car is a big step—especially if you’re financing it with a loan. One question many people ask is, “will financing a car build credit?” The answer is yes, but how much your score improves depends on how you manage the loan. A car loan may impact multiple aspects of your credit score, and in some cases, it may even lead to a short-term dip before boosting your score in the long run.
In this guide, we’ll explore how a car loan affects your credit score, what factors matter most, and what you can do to make sure your auto loan helps you build strong credit.
How car loans impact your credit score
Lenders report your loan activity to the three major credit bureaus: Experian, Equifax, and TransUnion. That loan then becomes part of your credit history, and how you manage it will influence your score. Here’s how a car loan may affect different parts of your credit:
1. Credit mix (10% of your score)
Your credit score benefits from having a variety of credit types, such as credit cards (revolving credit) and installment loans (like a car loan). If you don’t already have an installment loan, adding a car loan may improve your score by strengthening your credit mix.
2. Payment history (35%)
This is the most important factor in your credit score. Making consistent, on-time payments on your car loan will help build a positive payment history. On the flip side, late or missed payments may hurt your credit significantly.
3. New credit (10%)
Applying for a car loan usually results in a hard credit inquiry. This could cause a slight, temporary drop in your credit score. However, multiple auto loan inquiries within a short period (14-45 days, depending on the scoring model) are typically treated as one inquiry.
4. Length of credit history (15%)
The longer you keep your auto loan in good standing, the better it is for your credit. As your account ages, it contributes positively to your credit history.
5. Amounts owed (30%)
Your car loan adds to your total amount of debt, which may affect this category. However, installment debt is treated differently than credit card debt. As you pay down your loan, your balance decreases, which can help your credit over time.
What happens when you apply for a car loan?
When you apply for an auto loan, the lender performs a hard inquiry on your credit report. This inquiry may cause a small dip in your score—typically fewer than five points.
Here are a few things to keep in mind:
- Try to get prequalified to compare offers before applying.
- If you apply with multiple lenders, do so within a 14-day window.
- Review your credit report for accuracy before applying.
Once approved, your new car loan is reported to the credit bureaus. The loan amount, monthly payment, and payment history will now be tracked as part of your overall credit profile.
Can a car loan help build credit?
Absolutely. When managed properly, a car loan may be a useful tool for credit building. Here’s how:
- You establish an installment loan in your credit profile.
- You create a history of on-time payments.
- You improve your credit mix.
These factors combined could contribute to a healthier credit score over time. That said, car loans won’t build credit automatically. You need to make timely payments and avoid delinquencies to see a positive impact.
How fast could a car loan raise your credit score?
Some changes may appear within 30 days, but building strong credit is a long-term process. Your score may dip slightly at first due to the new credit inquiry and account. However, as you demonstrate responsible behavior over several months, your score may gradually improve.
Remember:
- Creditors typically report to bureaus once a month.
- A single missed payment might hurt your score and stay on your report for up to 7 years.
- Making auto payments on time is the most effective way to use a car loan to boost your credit.
Will a car loan hurt my credit?
It might—but only if it’s mismanaged. A few mistakes to avoid include:
- Missing or making late payments
- Taking on a loan you can’t afford
- Applying with multiple lenders over time
Before taking out a loan, ask yourself:
- Can I afford the monthly payments?
- Is the interest rate competitive?
- Will this help or hurt my long-term credit goals?
Conclusion: Financing a car may help you build credit
So, will financing a car build credit? Yes—but it depends on how you manage the loan. A car loan could positively affect your credit mix, payment history, and overall credit profile when used wisely. Use a car loan as an opportunity to demonstrate financial responsibility. Make payments on time, borrow within your means, and review your credit reports regularly. With consistency and planning, your car loan could be a powerful tool in your credit-building journey.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
