Does Buying a Car Build Your Credit Score?

A credit score numerically represents an individual’s creditworthiness, indicating the likelihood of repaying borrowed money. Lenders, insurers, and other entities use this score to assess financial risk and determine terms for loans, credit cards, and rental agreements.

Car Loans and Credit Reporting

When an individual finances a car, the auto loan is categorized as an installment loan. Lenders typically report the details of this loan to national credit reporting agencies, including Experian, TransUnion, and Equifax. Many lenders voluntarily provide this information, ensuring the loan appears on credit reports.

The reported information includes the original loan amount, current balance, loan term, account type, confirming it as an installment loan, and payment status. This detailed reporting creates a comprehensive record of the borrower’s financial obligation and repayment progress.

Payment Behavior and Credit Impact

Consistent and timely payments on a car loan build a positive payment history, which is a significant factor in credit scoring models. Payment history accounts for approximately 35% of a FICO Score, widely used by lenders. Each on-time payment demonstrates financial responsibility and reliability over the loan’s duration.

Making payments on or before the due date establishes responsible credit management. This consistent behavior strengthens the credit profile, leading to an improved credit score over time. Conversely, late or missed payments are reported to credit bureaus and negatively affect payment history. A single payment reported 30 or more days late can notably reduce a credit score.

Other Credit Score Components Affected by Car Loans

A car loan influences several other aspects of a credit score beyond payment history. One such factor is the credit mix, which considers the different types of credit an individual manages. An auto loan, as an installment loan, diversifies a credit profile that might otherwise consist solely of revolving credit like credit cards. Credit mix typically accounts for about 10% of a FICO Score, indicating the ability to handle various forms of debt.

When applying for an auto loan, lenders perform a hard inquiry into the applicant’s credit report. This inquiry results in a temporary, slight decrease in the credit score, typically by a few points. Multiple hard inquiries for car loans made within a short period are usually grouped and counted as a single inquiry to minimize impact.

The length of credit history is another affected component, representing about 15% of a FICO Score. While a new car loan can initially reduce the average age of accounts, consistent payments over time contribute positively to the overall length and stability of credit history.