Will a Car Payment Affect My Credit Score?

Will a Car Payment Affect My Credit Score?

Maintaining a good credit score is a necessity. However, every debt has some effect on your credit score. This includes car loans. If you are worried about how car payments will affect your credit score, we have some answers for you.

How Does Car Loan Affect Your Credit Score?

When you apply for a car loan, the lender makes a hard inquiry on your credit report. A hard inquiry takes away a few points from your credit score, and the points will stay off for one year. If you approached multiple lenders for car loans, you will see multiple hard inquiries on your credit report. However, these multiple inquiries are considered the same when your FICO score is calculated. Don’t worry about hard inquiries, because their effect will be offset once you start making payments.

What Happens After Your Car Loan Is Approved?

Debt increases your credit utilization and also increases your debt to income ratio. When your lender approves your car loan, the credit score drops by a few points. This happens because the new debt has no payment history and it is hard to for the lender to know if you’re going to make payments on time. The credit score will not repair itself until you start making car payments.

Do Car Payments Affect Your Credit Score?

Car payments affect your credit score. If you make car payments on time, the credit score will start improving. If you do not make car payments on time, your credit score starts falling. According to financial experts, your credit score may fall by 100 points if you miss a single car payment. Your credit score takes into all loans into account, such as mortgage loans, personal loans, car loans, credit card payments, and other loans. If you want your credit score to improve, you need to make all these payments on time. The lender reports to credit bureaus whenever you make a payment. If you are making car payments on time, your credit report will have notes such as paid as agreed or current loan amount. If you miss payments, the lender reports the missing payments and the credit bureaus lower your credit score.

What Happens If You Pay off the Car Loan Early?

Paying off a car loan early has a positive effect on your credit score. This happens because your debt to income ratio is reduced, and your credit utilization also decreases when you pay off the loan early. According to financial experts, you should only pay off the car loan early if you are saving money on the interest. If you are not saving much, it’s better to make car payments as agreed, which will help improve your credit score.

There is no doubt car payments can have a positive effect on credit score. If you have not taken any loans before, car payments can help you build good credit score as long as you make timely car payments.