Improving your credit score doesn’t usually happen overnight – it can often take months (or years) of hard work to build your credit. However, the hard work is worth it, and an auto loan can speed up the process.
Car Loans and Credit Building
Simply having an auto loan on your credit reports doesn’t improve your credit – what does is the payment history. Payment history makes up 35% of your total credit score. Having a long-standing payment history is the best thing you can do to show lenders you’re a responsible borrower and raise your credit score.
Once you take on a car loan, which is an installment loan, you might actually see a drop in your credit score. When you apply for new credit, it can lower your credit score by a few points.
This is because the FICO credit scoring model keeps track of how often you ask for new lines of credit. But don’t worry! Hard inquiries don’t stay on your credit reports forever, and they only impact your credit score for up to 12 months.
Since auto loans typically last for years – usually from 48 to 96 months – the potential for a consistent payment history is great for your credit score. If you make on-time payments for your entire loan term, it can really stand to improve your credit score as long as you don’t neglect your other bills and finances.
If you just took out a car loan, or you’re considering taking one on, you may not see quick credit score improvement for a while. Credit repair or building credit doesn’t happen overnight. In fact, it may take around a month or more for your first payments to appear on your credit reports.
But once those payments do start reporting, and you don’t miss any and make all of them on time, you’re on your way to a good repayment history for that auto loan. However, just because you have a good payment history with one account doesn’t mean that you can neglect your other types of credit.
What Your Credit Score Is Made Of
Since car loans can improve your credit score, let’s go over how your credit score is calculated.
- Payment history: 35% – Your history of making payments on your current and past credit accounts.
- Amounts owed: 30% – Keeps track of how much credit you have taken out, and how much you’re allowed to borrow.
- Length of credit history: 15% – How old your credit history is, and the different ages of your credit accounts.
- Credit mix: 10% – Considers the different kinds of credit you have.
- New credit: 10% – Keeps track of how many times you apply for new credit.
All these factors generate a three-digit number from 300 to 850, or your credit score. This is for the FICO credit scoring model, which is the most commonly used. If you apply for an auto loan, your lender is likely to look at your FICO credit score, so it’s important to know where you stand and how it’s formulated.
Other Quick Credit Building Tips
Even if you have a perfect payment history on your car loan, remember to monitor the other aspects of your credit score.
Here are some other quick credit improving tips:
- Keep your credit card balances below 30% (the lower the better).
- Make on-time payments on all your obligations and keep accounts out of collections.
- Don’t close old accounts, even if you don’t use them.
- Only apply for new credit when you need it.
- Review your credit reports for errors and dispute them.
Credit building takes hard work, but it’s the type of hard work that pays off – literally. When you have a better credit score, it can improve your chances of getting approved for new credit.
Additionally, borrowers with lower credit scores tend to get approved for higher interest rates, which means you’re going to be paying more for the things you purchase. By staying on top of all the aspects of your credit score, you can improve it and boost your car buying power, and save cash in the long run.
Knowing where you stand on the credit score spectrum is an important step in credit repair. You can check your credit score here.
Ready for a Car Loan?
By checking your credit reports and learning where you need to improve on your financial habits, you can turn an auto loan into a better credit score, but it does take some time. Who knew that a three-digit number was so complicated and dictated so much of your ability to get into the things you need, like car loans? We did.
Here at Auto Credit Express, we know that having a lower credit score can make getting into an auto loan a hassle. That’s why we work to match bad credit borrowers to dealerships that are signed up with subprime lenders. These lenders look at more than just your credit score when you’re being considered for a car loan approval.
If you’re ready to get the ball rolling on your next auto loan, fill out our free car loan request form. After you do, we’ll look for a dealer near you with the bad credit options you need.