If your credit isn’t spotless, qualifying for a car loan can be tough. However, once you do find a lender that’s right for your credit situation, an auto loan has the potential to actually help your credit score.
Car Loans and Your Payment History
Buying a vehicle with cash doesn’t do anything for your credit score, but if you finance with a lender that reports your loan to the credit bureaus, the car loan can raise your credit! If your credit score is tarnished from past bumps in the road, it’s not too late to improve it with an auto loan.
Every on-time payment you make on your car loan builds your credit score. It can take some time, since credit scores don’t improve overnight and credit building is a long-term game. It’s important to know that payment history is the single most important factor that makes up your FICO credit score: a whopping 35% of it, actually. We reference the FICO scoring model because it’s the one used most by lenders.
On the same note concerning payment history, one missed or late payment on your auto loan can hurt your credit score, and remain on your credit reports for up to seven years.
By making timely payments on your car loan and keeping the account in good standing, and then completing the auto loan, it looks great on your credit reports. Your FICO credit score serves as a way for lenders to tell if you’re able to manage large amounts of credit, and by proving you can handle a car loan, it can boost your credit score for future purchases.
Auto loans can also contribute to the other aspects of your credit score, and if you play your cards right, you could drive your way to an improved credit score.
Auto Loans and Other Credit Score Factors
There are three other important parts of your FICO credit score that can be largely impacted by a car loan: credit mix (10%), length of credit history (15%), and new credit (10%).
- Credit mix is concerned with the different kinds of credit you have. If you only have revolving credit, such as credit cards, then your credit mix isn’t likely to reflect on your credit score very well. However, having a healthy mix of both installment credit, such as auto loans, and revolving credit accounts that are in good standing helps. Car loans are a good way to mix in installment loans while building the length of your credit history, because they’re usually long-term loans.
- Auto loans impact your credit length. Car loans are generally between 48 months and 84 months long. By establishing a good, long-standing payment history on one account, you can boost the length of your credit history. This category is concerned with how old your current credit accounts are and averages the age of each account to generate your overall credit age. By keeping revolving credit accounts open, and having installment loans that are years long on your account, you can improve your credit score while those accounts are open.
- Auto loans can initially hurt your new credit category. When you first open a car loan, it can lower your credit score temporarily. New credit keeps track of how many times you apply for new credit, and it gets noted on your credit reports – called a hard inquiry. A hard inquiry can lower your credit score by a few points, but it only impacts your credit score for up to 12 months, and gets removed from your credit reports after two years.
So, when you first take on an auto loan, your credit score can drop a little. It takes some time to build it up when you’re first starting out in credit, or if you have past negative marks on their credit reports. Just remember that nearly every negative mark on your credit reports is temporary – they only last for up to seven years or less before dropping off.
Repairing Your Credit With an Auto Loan
Repairing your credit score with a car loan isn’t simply adding it to your credit reports. You must make on-time payments and avoid defaulting on loans, and do your best to avoid getting the vehicle repossessed. Missed payments, default, and repos can have devastating consequences on your credit score.
By staying current on your bills and loans, and taking on new credit that proves you can handle repaying it, you can be on your way to a better credit score. To get started on repairing your credit with an auto loan, you’ve got to work with a lender that has the resources for credit-challenged borrowers, but where are they?
Don’t worry – we know where they are, and we want to help you find them. Here at Auto Credit Express, we’ve cultivated a network of dealers that are signed up with bad credit car lenders. To get matched to a dealership near you, fill out our free and secure auto loan request form.