Does Buying a Car Build Credit?
Learn how financing a car can positively or negatively shape your credit report and score, offering a path to credit growth.
Credit scores are numerical summaries of a person’s credit risk, calculated from information in their credit report. Financing a car can build credit, and understanding this process involves examining how car loans appear on credit reports, how payment behavior directly influences scores, and how to monitor these changes.
How Car Loans Influence Your Credit Report
Financing a car involves taking out an installment loan, which differs from revolving credit like credit cards. An installment loan is characterized by a fixed loan amount repaid over a set period through regular, scheduled payments. When a car loan is approved, the opening of this new account is reported to the major credit bureaus—Equifax, Experian, and TransUnion.
The application process for a car loan typically initiates a “hard inquiry” on your credit report. While a single hard inquiry might cause a small, temporary dip of a few points in your credit score, its effect is usually short-lived, often diminishing within a few months and remaining on your report for up to two years. Credit scoring models often treat multiple inquiries for the same type of loan, like car loans, within a specific shopping window (typically 14 to 45 days) as a single inquiry to account for rate shopping.
Once the loan is established, loan details are recorded on your credit report. The inclusion of an installment loan contributes to your “credit mix,” which is one of the factors considered in credit scoring. Demonstrating the ability to manage different types of credit, including both installment loans and revolving credit, can positively influence your overall credit profile.
The Direct Link Between Loan Payments and Your Credit Score
Payment history is the most significant factor in credit scoring, accounting for approximately 35% of your FICO Score and potentially up to 40% for VantageScore models. Consistent, on-time payments on your car loan demonstrate responsible credit management and positively contribute to your credit score over time.
Conversely, late or missed payments can severely damage your credit score. Creditors typically report payments as late to the credit bureaus once they are 30 days past due. Even a single payment reported 30 days late can cause a significant drop in your score, potentially by 100 points or more, and this negative mark can remain on your credit report for up to seven years. The impact generally worsens the longer a payment is overdue, with 60, 90, or 120-day delinquencies causing more severe damage.
Defaulting on a car loan, which typically occurs after an extended period of missed payments, has serious consequences. A default can lead to the repossession of the vehicle, as the car serves as collateral for the loan. Both a default and a repossession are reported to credit bureaus and can remain on your credit report for up to seven years, significantly hindering your ability to obtain future credit.
The length of your credit history, including the age of your car loan account, also influences your credit score. A longer history of responsibly managed credit accounts generally has a positive effect. As the car loan matures and is paid down, the reduction in the outstanding loan balance can indirectly benefit your credit score.
Monitoring Your Credit After a Car Loan
Regularly checking your credit report and credit score is important to track the impact of your car loan and ensure accuracy. Consumers are entitled to a free credit report weekly from each of the three nationwide credit reporting companies: Equifax, Experian, and TransUnion. These can be accessed through AnnualCreditReport.com, the only authorized website for these free reports.
When reviewing your credit report, look for the car loan account to verify that payments are being reported accurately as on-time. Confirm account status, reported balance, and ensure no errors or unauthorized inquiries. While credit scores may experience a small, temporary dip when a new loan is opened, consistent on-time payments should lead to a recovery and improvement in your score over time. Monitoring helps identify any discrepancies promptly, allowing you to dispute inaccurate information with the credit bureaus.