Getting a car loan can affect your credit score in a variety of ways. Initially, it might cause it to drop a few points, but over the long run, it can give your credit a boost. So, you might be wondering, how fast will a car loan raise my credit score? The answer depends on the contents of your credit report and how well you keep up with your loan payments.
When Does a Car Loan Show Up on Your Credit Report?
A car loan can begin affecting your credit before the lender has even approved you for the loan. This is because when you apply for a loan, the hard inquiry (the lender’s request for your credit report to ensure you’re a good candidate for a loan) appears on your credit the same day or a few days later.
When you get approved for and finalize the loan, it should appear on your credit report within 30 days of the first billing cycle. Because the initial loan amount is likely significant, this new credit can lower your score temporarily. As you pay off the loan, however, your debt-to-income ratio will decrease, and your credit score should normalize.
A car loan stays on your credit history for 10 years past its lifetime. For example, if you have a three-year loan, it will impact your credit for 13 years.
How a Car Loan Can Affect Your Credit
A car loan can both lower and raise your credit score. If you keep up with your payments, however, the net effect should be positive. Here are the three main ways a car loan will impact your credit.
Hard inquiries reduce your credit score by only about two points and stay on your credit report for two years. If you haven’t applied for credit recently, the impact on your credit should be minimal. If you’ve had many hard inquiries recently — beyond those associated with your car loan application — you could appear riskier to lenders, and your score could drop more.
Don’t worry, however, if you’ve applied for a car loan with multiple lenders, which is a smart part of shopping around for the best rates. These credit checks count as a single hard inquiry when they occur within two weeks of each other. Occasional hard inquiries can even work in your favor, showing FICO you’re using your credit.
Your payment history represents a major portion of your credit score. Every payment you make on your car loan gets reported to the major credit bureaus. As long as you make each of these payments on time and in full, you should see your credit score rise in as little as six months. While these are short-term improvements, they can result in significant credit score increases. Timely payments also help reduce your debt, which can raise your credit score.
Missing or making late payments has the opposite effect on your credit score. If you don’t make your payment by the date it’s due, you’ll not only have to pay late fees but might also get a late-payment designation on your credit history. The mark only shows up if you’re at least 30 days late on your payment. It can stay on your credit history for up to 10 years.
A variety of credit types can also help raise your credit score. Lenders like to see that individuals have a mix of credit and can make payments on all of them in a timely manner. It shows you’re a responsible borrower who can handle making multiple payments. Therefore, adding a car loan to your existing credit mix can have a positive impact on your credit score. Examples of other credit types you might have include:
- Personal loans
- Student loans
- Credit cards
- Other revolving credit
As soon as the car loan appears on your credit report, your score should show a slight improvement.
Factors That Affect Your Credit Score
To understand how fast and significantly a car loan will raise your credit score, it’s important to know how your FICO score is calculated. It’s based on five elements:
- Payment history, 35%: Your payment history has the greatest impact on your credit score because it shows lenders whether you have paid past debts on time. Keeping up with your auto loan payments can help build a positive credit history.
- Amount owed, 30%: Also called a credit utilization ratio, this figure is the total of your credit card and loan balances. You ideally want this amount to be less than 10% of your total credit limits and definitely no more than 30%. Lenders see individuals using a lot of their available credit as a higher risk of defaulting on their loans.
- Credit history, 15%: A long credit history shows lenders you can maintain and pay off accounts over long periods. You might want to avoid closing any old accounts if you don’t want your score to drop.
- Credit diversity, 10%: As discussed, a variety of credit cards, loans, and accounts shows your ability to manage multiple payments and due dates.
- New credit, 10%: Taking on several new loans or credit accounts can potentially overburden your finances and make you a riskier borrower. As long as you haven’t opened multiple accounts recently, however, a new car loan won’t lower your credit score.
How To Raise Your Credit Score
A car loan will only raise your credit score in small increments over time. In the meantime, here are other ways to build credit and improve your score:
- Always make payments on time, whether for your car loan, credit cards, or other accounts.
- Pay off your debts as quickly as possible. If you can get your credit card balance down to zero, for instance, your credit score should increase immediately.
- Avoid applying for new loans or credit cards at the same time as your car loan, as the hard inquiries associated with them can lower your credit score temporarily.
- Keep credit accounts, particularly ones you’ve had a long time, open to maximize your average credit age.
Getting a loan to buy a car can help you raise your credit score over the loan’s life span. You won’t see an immediate score increase, but it should help you build credit over the long term. If you want to see incremental credit score increases over six months, one year, two years, and beyond, make your car loan payments in full and on time.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.