When you decide to buy a new car and get a loan for the car, you should be aware that the loan will be reported by your credit lender. The loan adds to your credit history and will have a positive impact as long as you make your monthly payments on time.
You will see your credit score improve over time if you make regular payments on your auto loan. If you had negative marks on your credit in the past, you’ll see them offset by these positive actions, such as timely payments and building a stronger credit history. As time passes, past negative actions will start to fall off your credit report allowing more positive actions, such as prompt payments, to rapidly increase your credit score.
How Your Auto Loan Makes a Difference in Your Credit Score
When you buy your new or used vehicle, the loan you take out will initially hit your credit score and may make it fall slightly, usually by around three to five points. The credit score may go down slightly because of the hard inquiry on your report and the additional debt will alter your debt-to-income ratio.
After the decrease in your credit score, you should notice your credit score increasing over time. Each time you make a loan payment on time, your credit score will improve. Additionally, the length of the loan may improve your score by showing that you can hold debt for longer periods without defaulting and can manage a long credit history. Other areas of your credit score that might be positively influenced include total debt owed, which decreases over time, and a mix of credit types, such as loans or credit cards with revolving credit.
What’s the Most Important Step for Improving Your Credit Score?
The most important thing you can do to improve your credit score is to make your car payments on time. If you miss a loan payment, make a late payment or default on payments, you could negatively impact your credit score. If you have your vehicle repossessed, this action will tarnish your credit as well.
If you continue to make payments on time, build up a long, positive credit history and pay off the loan successfully, you should see improvements in your credit history and score. All of this can help you get better loans and credit opportunities in the future.
