- An auto loan could affect several factors that make up your credit score.
- The change can come in as little as 30 days.
- If handled responsibly, the loan could help you build good credit.
Buying a car can be a great moment in your life, especially if it’s your first car. And the last thing you might be thinking as you leave the lot is, “How fast will a car loan raise my credit score?” But it’s a valid question for anyone concerned about their financial health and good credit. The change could come in as little as 30 days. And if you handle the loan responsibly, it could actually help your credit score and bolster your access to future lines of credit.
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Credit scores and car loans
Lenders want to know how risky it might be to loan you money for a car. To do so, they use information provided by the three major credit bureaus – Equifax, Experian, and TransUnion. The most common credit score model used by the major credit bureaus to gauge someone’s creditworthiness is the FICO® model.
Let’s look at a quick breakdown of what goes into the FICO® score and generates the number lenders use in their decision-making process. Your credit score is based on five categories:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
So, how could your new car loan impact your score? It depends on your overall credit history and current status.
The loan application
When you apply for an auto loan, typically the lender reviews your application and does a hard credit inquiry. A hard credit inquiry is a request to one or all three of the major credit bureaus for your full credit report. That allows the lender to review your credit history and credit score. Hard inquiries occur when you are actively applying for credit, and the inquiry is recorded in your credit history (usually for 2 years). It’s good to remember that a hard inquiry on your account may cause your credit score to dip a little.
In comparison, a soft inquiry also seeks a credit report, but for other reasons. These inquiries occur when you check your own report, when one of your creditors checks your current status, or when you’ve put in for a pre-approval offer. A soft inquiry does not appear on your credit history because it isn’t used to obtain new credit.
Before approving a new car loan, the lender makes a detailed review of your credit profile. They’ll look at your payment history for any negative events, like late payments, missed payments, or defaults.
The takeaway: Plan out your applications for an auto loan. Obtain pre-approvals as much as possible, then apply after you’ve settled on a car. And if you want to apply to multiple lenders, it might be advisable to do it all within a 14-day period. The VantageScore Credit Score®, an alternative to FICO®, counts multiple loan applications within 14 days as a single inquiry. FICO® has a 45-day safe harbor period.
The loan is approved
You’ve been approved for the loan, and that’s great news. At this point, your lender reports the car loan to the credit bureaus. The bureaus add the new credit account to your record, recording the loan total and your monthly payment amount. The new account affects your credit score in different ways:
- The credit account counts as new credit. Opening multiple credit accounts in a short period is viewed as an increased risk to lenders, so it may reduce your score somewhat. That is more likely if you have applied for other credit lines recently.
- If you don’t have any other installment debt at this time, the new loan may increase your credit score by improving the credit mix FICO® scoring prefers a mix of credit types: revolving credit (credit card debt), mortgages, retail accounts, and installment loans, such as the one for your new car. Depending on your credit status, and your current debt types, the new loan might add points to your score in the credit mix section.
Most creditors report their information every 30 days, so you may see changes to your score (both up or down) after a month or so from the time you got your new loan.
What will raise my credit score?
When it comes to car payments, making on-time payments is probably the surest way to improve your credit score. Over time, car loans affect credit scores in several ways:
- The payment history section counts for 35% of your score, and making regular payments helps build credit history.
- Length of credit history counts for only 15%, but every bit helps. The longer you stay current on your account, the more it could add to your score. Plus, lenders like to see credit reports that feature established accounts, with on-time loan payments. That may help you in the future if you need to get personal loans, mortgage loans, or revolving debt like credit cards.
- The small negative impact on new credit becomes less important as time goes by. So, the longer you pay your loan, the more your score may increase. Since new credit counts for only 10% of your score, the impact from this factor is limited.
When you wonder “When will this car loan raise my credit score?” you should look for gradual changes. Assume your lenders report your payments every 30 days, so the fastest you’ll likely see any changes to your credit score is month by month.
If you want to maintain or improve your credit score, buy a car that keeps the loan well within your means. Shop around for an interest rate that helps to keep your monthly payments manageable. If you are sure you will always have enough in your account, set up an auto-payment schedule for your car payment. That way, timely payments are always made.
Building credit isn’t so much about how fast you can do it, it’s more about being reliable and consistent in your payments. Car payments build credit, but it takes some time. Do your part, and you’ll get there.
For learn more about credit, read these articles in the Best Egg Resources center: