How Do Car Loans Affect My Credit Score?

Here's what happens to your credit before, during, and after taking out a car loan.

Capital One | 

Aug 25, 2021 | 4 min read

Capital One

Originally published on April 16, 2018

Let’s explore the ways in which your credit could be impacted as you complete your car buying journey.

WILL SHOPPING FOR A CAR LOAN AFFECT MY CREDIT SCORE?

When you’re shopping for the best financing rates, some lenders will perform a hard pull to your credit. While hard pulls do usually impact your score, a single hard inquiry typically drops your credit score by just a few points, so the overall impact should be small. If you have multiple hard pulls from various auto lenders, it’s also important to note that they will all be rolled into one as long as they occur within a specific timeframe, according to FICO, the company that calculates the most widely used credit scores. This window generally only applies to inquiries for installment-type loans such as auto loans and mortgages. Depending on the credit bureau, the range in some cases could be up to 45 days.

DOES TAKING OUT A CAR LOAN HURT YOUR CREDIT?

To understand the overall impact of a car loan, it’s important to understand the anatomy of a credit score. When FICO calculates scores (on a scale from 300 to 850 points), it considers these 5 key factors:

1. Payment history
   Making on-time payments is the most important aspect of your credit score.
2. Credit utilization
   This measures how much of your available credit you use. To find the current optimal utilization rate, you can check with the three nationwide credit reporting bureaus: Equifax, Experian, or TransUnion. Carrying high balances on multiple accounts can indicate a higher risk of defaulting to lenders.
3. Length of credit history
   In general, the longer you have established credit with on-time payments, the better your score. But FICO looks at multiple indicators related to credit history.
4. New credit
   Establishing new credit can help improve your credit utilization ratio, but only open accounts as needed. Applying for multiple credit cards at once, for instance, can have an adverse effect on your score.
5. Credit mix
   Managing different kinds of credit, such as an auto loan and credit cards, can be a plus.

Taking the above into account, a car loan can have a few different effects on your credit score.

First, it will increase your total debt load and change your credit utilization ratio, which may cause a slight drop in your score. If you’ve just established the loan, there’s no payment history yet, but any slight decline in credit score should be remedied quickly if you make your first few payments on time. After all, payment history has the biggest impact on FICO scores.

An auto loan can also improve your credit mix, particularly if you didn’t already have an installment-type account on your report. A diverse credit portfolio articulates that you have successfully managed different kinds of credit, which appeals to lenders.

DOES YOUR CREDIT SCORE GO UP WHEN YOU PAY OFF A CAR LOAN?

If you pay down the balance of your auto loan over time, your credit utilization will go down, so your credit score may improve. Making regular on-time payments is good for your payment history, and will help maintain and possibly improve your score.

If you are considering paying off your loan early to save on interest fees, make sure your loan agreement doesn’t include penalties for doing so. Sometimes keeping the loan going a bit longer, with on-time payments, can have a positive impact on your credit score. Managed properly, open lines of credit help establish a strong history.

On the flip side, if you find yourself struggling to make payments on time, it could be worthwhile to check if you’re eligible for a loan extension, which could provide temporary financial relief.

Don’t Be Afraid to Check Your Credit Report Regularly

Understanding how car loans affect credit scores and the impacts that buying a car will have on it will help you continue to improve your credit score.

Checking your credit report regularly results in a soft inquiry that won’t hurt your credit score at all, so don’t be afraid to do it regularly. You are entitled to one free credit report per year from each of the three nationwide credit reporting bureaus (TransUnion, Experian, and Equifax).

Capital One

Banking should leave you with the same great feeling you get when you drive casually on a weekend afternoon. And that’s how I feel when writing helpful tips and reviews – passionate about cars and passionate about financing and everything in between when buying a new ride.