Buying a car is an exciting milestone in life. However, it also represents a large financial decision that can impact your credit score and financial health. If you’re wondering “Will my credit go up if I buy a car?” the answer depends on several factors. In this article, we’ll explore how an auto loan can affect your credit score and steps you can take to ensure it improves your credit.
How Does Buying a Car Initially Impact Your Credit Score?
When you first apply for an auto loan it will likely cause a small, temporary drop in your credit score. Here’s why
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When you apply for an auto loan, lenders will check your credit report, which will show up as a “hard inquiry” on your report. Your credit score can drop by up to 10 points for every hard inquiry.
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New Account: Getting approved for the auto loan will add a new account to your credit report. The new account will lower the average age of your credit history, which makes up 15% of your score.
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More debt: The new car loan adds to your debt, which could lower your credit score by a few points until you start paying it back.
The first drop in credit score that happens when you buy a car is usually small (10–30 points) and short-lived. Your score will start to rise again as soon as you start making payments on time.
How Can an Auto Loan Improve Your Credit Long-Term?
As soon as you buy a car, your credit score goes down. But getting an auto loan can help your credit in the long run in a few important ways:
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On-Time Payments: Making consistent on-time payments on your auto loan builds positive payment history, the biggest factor in your score.
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Credit Mix: Having an installment loan like an auto loan in addition to credit cards shows you can manage different types of credit responsibly.
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Age of Credit History: Keeping the auto loan open after paying it off will help increase the average age of your credit history.
As long as you make all your payments on time, an auto loan can help build your credit history and improve your score over time. Many people see their scores start to increase after about 6 months of on-time payments.
Tips to Ensure an Auto Loan Improves Your Credit
Follow these tips to make sure your auto loan builds your credit score over time:
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Make payments on time: Set up autopay or reminders to avoid missed payments, which severely hurt your score.
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Pay off loan fully: Continue making payments until the loan is completely paid off to get the full long-term credit benefits.
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Check credit reports: Verify the loan is reporting correctly by reviewing your credit reports. Dispute any errors with the lender and credit bureaus.
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Don’t take on more debt: Avoid applying for more credit while repaying your auto loan to prevent additional hard inquiries. Wait 6-12 months before applying for more credit.
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Consider down payment: Putting down a larger down payment means you’ll borrow less, which causes less initial credit score damage.
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Lower interest rate: Shop around for the lowest rate possible, as this lowers your total interest costs and helps you repay the loan faster.
What Hurts Your Credit When Buying a Car?
There are a few scenarios where buying a car could hurt your credit long-term instead of improving it:
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Missed payments: If you miss payments, it damages your credit history significantly. Just one 30-day late payment can remain on your report for 7 years.
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Defaulting on the loan: If you can no longer afford payments and default, it can harm your score for up to 7 years. Your car could also be repossessed.
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Taking on too much debt: If your auto loan leaves you unable to pay other bills, you may miss payments and hurt your credit. Don’t borrow more than you can realistically repay.
How Long Does It Take for an Auto Loan to Improve Your Credit?
Most people see their credit begin improving about 6 months after taking out an auto loan, assuming they make consistent on-time payments. It takes this long for the positive payment history to start outweighing the initial negative impacts of the hard inquiry and new debt.
After one year of payments, your score improvement will become more noticeable. It takes a few years of regular on-time payments for an auto loan to maximize the positive effects on your credit score.
Patience is key – building strong credit takes time. Stay diligent about making monthly payments on time and your auto loan will start working in your favor to boost your credit within 6-12 months.
Can You Improve Your Credit Score Fast with an Auto Loan?
While an auto loan can help build your credit over time, it isn’t a quick fix for bad credit. Some ways to potentially improve your credit score more rapidly include:
- Paying down credit card balances
- Disputing errors on your credit reports
- Becoming an authorized user on someone else’s credit account
Realistically, it takes diligent credit management over many months or years to significantly increase your score. There is no quick and easy way to give your credit score an immediate boost with an auto loan.
The most important things are making payments on time, keeping credit card balances low, limiting hard inquiries, and being patient. By taking these steps, your auto loan will help steadily build your credit history.
Weigh the Pros and Cons of an Auto Loan
Before taking out an auto loan, be sure to carefully weigh the pros and cons:
Pros
- Can help build your credit history and score over time
- Gives you access to a reliable vehicle
Cons
- Causes a small temporary drop in your credit score initially
- Monthly loan payments are a long-term commitment
- Interest charges increase the total cost
Don’t take on an auto loan solely to build your credit – make sure it fits your budget and transportation needs. With responsible use, an auto loan can be a valuable tool for improving your credit score while also meeting your needs.
The answer to the question “will my credit go up if I buy a car?” depends on how you manage the auto loan. In the short term, your credit may temporarily drop when you first take out the loan. But if used wisely by making consistent on-time payments, an auto loan can help build your credit history and improve your score over the long haul. Focus on diligent credit management and be patient. With time, your new auto loan can become a valuable asset for boosting your credit.
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If youâve only had credit cards and are considering your first car loan, you may want to know how fast a car loan could build your FICO® credit score.
So, does a car loan affect your credit score, and can a car loan build your credit? Keep reading to learn more about how car loans show up on your credit report and influence your credit score so you know what to expect.
How can I build my credit score by 100 points in 30 days?
There is no guarantee that you can build your credit score by 100 points in 30 days, and you should not buy a car with a loan in order to try and do this.
Having a car loan can help your credit over time as long as you always pay by the due date.
Your credit score is made up of multiple factors, but the biggest ones that you may be able to fix in 30 days can be a tall order.
If you are wondering how to get a car loan with bad credit and want to take the necessary steps to bump your credit in a hurry, these are a few places you could consider focusing on:
- Pay off revolving debt balances: One of your credit scoreâs biggest factors can be your credit card balance. Consistently paying off your credit card balance each month can contribute to lifting your credit score over time. [4]
- Pay on-time going forward: This wonât have an immediate impact on your credit, but it is one of the largest factors in your credit score. A perfect on-time payment history takes years to build after a string of past mistakes, but thereâs no better time to get on track than today.
- Donât apply for new credit: In the section above, we looked at how credit checks and inquiries for new accounts can temporarily lower your credit score. If you want to bump your credit score quickly, donât apply for any new credit cards or loans.
- Donât close any credit accounts: Just as opening new credit accounts lowers your average age of credit, closing accounts can lower your average credit age.
How a Car Loan Affects Credit Score – Auto loans raise or lower scores? How fast? How many points?
FAQ
Will buying a car boost my credit score?
An auto loan is a type of installment loan, like most student loans, mortgage loans, and personal loans. Getting a car loan should help your credit score over time as long as you pay it off on time every month. You shouldn’t buy a car or get a car loan just to build credit. Auto loans can be expensive.
How long after buying a car will my credit score go up?
There’s no set time frame for how long it takes a car loan to improve your credit score. You can expect your score to go up after buying a car as long as you make your payments on time and pay down the loan balance.
How to get a 700 credit score in 30 days?
Achieving a 700 credit score in 30 days is a very ambitious goal, and may not be realistic for everyone. However, focusing on key areas can lead to significant improvements. Making all of your payments on time, using less credit, and disputing any mistakes on your credit report should be your top priorities.
How fast does a car build credit?
How Fast Will a Car Loan Raise My Credit Score? You probably won’t see a boost overnight, but you can expect to see some movement after a few months—usually within 3 to 6 months if you’re making payments consistently.