Will a Car Payment Affect My Credit Score?

Will a Car Payment Affect My Credit Score?

Purchasing a car is a big investment for most people. You will get a lower interest rate on loans if you maintain a good credit score. Many people don’t take out car loans because they’re worried it will have a bad effect on their credit score, but this is untrue. Here are some answers to common questions about how car payments affect credit scores.

What Happens to a Credit Score When You Apply for a Car Loan?

When you apply for a car loan, a few different lenders will see your application. Every lender initiates a hard inquiry on your credit report before deciding to take your application. According to financial experts, the hard inquiry shaves off a few points from the credit score, but only temporarily. Once you start making car payments, the financial activity will offset the minuscule damage caused by a hard inquiry on your credit report. Don’t be afraid to allow multiple inquiries, because if they’re all checking for the same loan, they will be counted as the same inquiry on your score. Hard inquiries only stay on your credit report for one year.

What Happens to Your Credit Score When a Car Loan Is Approved?

A new car loan will marginally reduce your credit score. This is because there is no payment history for the new car loan, and the lender doesn’t know if you will make your payments on time. Your credit score will improve after you make the first car payment as agreed.

Do Car Payments Affect Your Credit Score?

Yes, car payments affect your credit score. If you make car payments on time, it helps your credit score. However, if you are late on payments, your credit score drops. According to financial experts, if you are late for a single payment, your credit score can drop by 100 points. If you miss a payment, it takes a longer time to recover from those lost points. It will take a longer time to recover from the drop and build your credit again.

How Much Will Car Payments Increase Credit Scores?

It is difficult to tell how much your credit score will increase by timely car payments. Credit scores take multiple things into account, like the loan amount, payment history, other loan repayments, credit utilization ratio, and your debt to income ratio. If you have a credit score in the 800s, your score could rise by 50 points if you pay everything on time. If you have a lower credit score, like in the 400s, you will have to wait a while before you see any improvement. Also, don’t forget your other loan payments. Everything needs to be paid on time and in full, not just your car payments.

Lenders are required to report financial activity to credit bureaus on a timely basis. A car payment can help improve your credit score. This is because it will show you are responsible for your debts, and the credit bureaus will note that your car loan is current or paid as agreed.