Getting financing for a car is actually a great way to build credit. However, many consumers also can experience damage to their credit from a car loan due to delinquent or partial payments.
Your credit score is the summation of 5 total factors. Some of these factors have a larger impact than others. If you are thinking of financing a car, there are 3 main credit score factors that will be affected by your financing. These 3 factors are payment history, new credit, and credit mix.
Payment history on its own is the single largest factor that affects your score, accounting for 35% of the total scoring formula. When you are getting financing for a car, you must pay each and every payment on time and in full. If you are unable to make the necessary payments, your payment history will receive negative marks, thus leading to a lower credit score.
However, if you make your payments on time and in full, you should see a rise in your score throughout the life of the loan. After you receive your financing, ask that the lender report your payments to all 3 credit bureaus. This way, any and all positive payments will increase your score from all 3 bureaus.
The other 2 factors: credit mix and new credit, will also experience an increase from an auto loan. Credit mix can be increased by adding a new line of credit. Your new credit category will also increase since you just took out a brand new auto loan. These 2 factors will make up 20% of your credit score together.
When Will My Score Increase?
An auto loan is a long-term loan, with the average American taking out an auto loan with a 5-year repayment plan, or 60 months. Your credit score will continue to grow throughout the life of your auto loan. Although you may not see any changes overnight, know that the credit bureaus will be receiving all of your positive payment history.
If you are not careful, however, an auto loan could mean future disaster for your credit score. If you miss multiple payments, a lender could repossess your car. A repossession can easily drop your score by 100 points or more. To protect and increase your credit score, be sure to:
- Pay your loan on time and in full
- Do not apply for loans from multiple lenders in a short period of time
- Set up an autopay program for your auto loan payments
- Ask yourself if you can truly afford to get a new car
Getting an auto loan is one of the most effective ways to build credit. If you are looking to buy a new car but are in need of financing, CrediReady can help. Our nationwide network of trusted dealers and verified lenders work with buyers in all credit situations. Take a moment to fill out our free no-obligation loan inquiry form and start shopping for your dream car today!