Does a Car Loan Lower Your Credit Score?
Understand the nuanced impact of a car loan on your credit score, from initial application to long-term repayment, and learn to manage it wisely.
A car loan represents a significant financial commitment that can influence an individual’s credit score. Credit scores are dynamic, reflecting various aspects of a person’s borrowing and repayment behaviors. Both the initial application process and the ongoing management of a car loan contribute to these score fluctuations.
Initial Credit Score Changes from a Car Loan Application
Applying for a car loan typically initiates a “hard inquiry” on your credit report. A single hard inquiry can cause a small, temporary decrease in your credit score. However, the impact is usually minimal and short-lived, with scores often rebounding within a few months.
When comparing auto loan offers from multiple lenders, it is common to have several hard inquiries. Credit scoring models recognize this “rate shopping” behavior. Multiple inquiries for the same type of loan within a specific timeframe, generally 14 to 45 days, are typically treated as a single inquiry for scoring purposes.
Opening a new credit account, such as a car loan, can also cause a slight temporary dip in your score. This happens because it lowers the average age of your existing credit accounts. Additionally, adding new debt to your profile can temporarily increase your total outstanding debt. These effects are usually minor and transient, especially if you have an otherwise established credit history.
Long-Term Effects of a Car Loan on Your Credit Score
The most significant long-term influence of a car loan on your credit score stems from your payment history. Consistent, on-time payments demonstrate responsible credit management and can positively build your credit over time. Payment history is the most impactful factor in credit scoring models, often accounting for 35% of a FICO Score.
Conversely, late or missed payments can severely damage your credit score. Creditors generally report a payment as late to credit bureaus once it is 30 days or more past its due date. Even a single 30-day late payment can cause a significant score drop and remain on your credit report for up to seven years. The longer a payment remains overdue, such as 60 or 90 days, the more severe the negative impact becomes.
A car loan, as an installment loan, can also positively contribute to your credit mix. Credit scoring models consider the variety of credit types you manage, including both revolving credit and installment credit. A diverse credit portfolio can show lenders that you are capable of handling different kinds of debt responsibly, which accounts for approximately 10% of your FICO Score.
Maximizing the Positive Impact of Your Car Loan
To ensure your car loan positively affects your credit score, making every payment on time is important. Setting up automatic payments or calendar reminders can help prevent missed due dates. Even a payment that is only a few days late can incur fees, and if it extends beyond 30 days, it will be reported to credit bureaus, negatively impacting your score.
Managing all other credit accounts responsibly is also important, as a car loan is just one component of your overall credit profile. Maintaining low balances on credit cards and making timely payments on other loans contribute to a strong credit history. Avoid taking on excessive new debt immediately after securing a car loan. Opening multiple new credit accounts in a short period can signal increased risk to lenders and lead to additional hard inquiries.
Regularly monitoring your credit report is an actionable step to track your progress and identify any inaccuracies. Consumers are entitled to a free copy of their credit report annually from each of the three major credit bureaus. Reviewing these reports allows you to ensure all car loan payments are correctly reported and helps you understand how your financial behaviors are shaping your credit standing.