Does Getting a Car Loan Affect Your Credit Score?
Understand how a car loan impacts your credit score, from the initial application to ongoing management. Learn the various ways it influences your financial standing.
A credit score is a three-digit number representing financial trustworthiness. This score helps lenders assess the risk associated with extending credit. Obtaining a car loan influences your credit score in several ways. Understanding these impacts is important for financial planning, and this article explains how securing and managing a car loan affects your credit.
The Application’s Initial Impact
Applying for a car loan initiates a “hard inquiry” on your credit report. This occurs when a lender requests your full credit report to make a lending decision. This action is recorded on your credit report and typically causes a small, temporary dip in your credit score, often by a few points.
The minor score reduction happens because seeking new credit signals a potential increase in your debt burden, which can be seen as a slightly elevated risk by credit scoring models. The impact of a single hard inquiry is usually minimal and short-lived, fading from your score within three to six months. Credit scoring models recognize that consumers often shop for the best loan rates. Multiple inquiries for the same type of loan within 14 to 45 days are often treated as a single inquiry to mitigate the cumulative impact on your score.
The New Loan’s Immediate Impact on Your Credit Profile
Once a car loan is approved and reported to credit bureaus, it appears on your credit report as a new installment account. This new account immediately affects the “average age of accounts.” Since it starts at an age of zero, it can lower the average age of all your credit accounts, potentially causing another temporary dip in your credit score.
Introducing an installment loan can positively influence your “credit mix” if your existing credit primarily consists of revolving accounts like credit cards. Demonstrating the ability to manage different types of credit responsibly can be favorable for your score. The initial loan amount adds to your “amounts owed,” increasing your total debt burden. While credit utilization is more commonly associated with revolving credit, the overall debt level is a component considered by credit scoring models.
The Ongoing Impact of Managing Your Car Loan
The most significant effect of a car loan on your credit score comes from how you manage the account. Payment history is the most influential factor in credit scoring models, accounting for about 35% of a FICO score. Consistently making on-time payments demonstrates financial reliability to lenders. Each timely payment contributes positively to your credit profile, reinforcing your ability to meet financial obligations and steadily improving your credit score over time.
Conversely, late payments, missed payments, or loan defaults can severely damage your credit score. A single payment reported 30 days or more past its due date can significantly reduce your score, and the negative impact can persist on your credit report for up to seven years. As you pay down the principal balance of your car loan, your “amounts owed” or “credit utilization” ratio improves. This reduction in your debt burden is viewed favorably by credit scoring models and can contribute to score improvements. As the loan ages and you continue to manage it responsibly, it contributes positively to the “length of credit history” component of your score. A longer history of well-managed credit accounts is beneficial for your credit standing.