Buying a new car is a big investment. Many people worry about how the auto loan and repayment will affect their credit score. Here are some different ways a car payment can affect your credit score.
When You Apply for a Car Loan
When you approach a lender for car auto loan, the lender will take a hard look at credit score, which will take some points off. However, don’t be afraid to approach a few lenders to find the best interest rate for you. According to credit bureaus, all hard enquiries from different lenders for the same type of loan are counted as one enquiry, so it won’t affect your score if you check with more than one lender.
When you make timely car payments, it will reflect well on your credit score and offset the initial drop in points you take when seeking out a loan.
What Happens to the Credit Score When the Car Loan Is Approved?
A debt has a negative effect on your credit score. When your loan is approved, your credit score will dip temporarily. This is because it is hard for the credit bureau to know if you’re going to make your payments on time. Your credit score does not improve until you start making car payments. If you default on car payments, your score will continue to falter.
What Happens to Your Credit Score When You Make Car Payments?
When you make timely car payments, your debt decreases and the lender reports your payments to credit bureaus. Over time, this will bring your credit score up. It is difficult to tell the exact number this will bring your score to. According to experts, if you have a credit score in the 800’s, timely car payments can only raise your score to 850. If you have lower credit score, it will take a longer time to see your score heal.
When you pay car payments on time, your credit report will leave a note that says, “paid as agreed,” or your current loan account. The payment history has the biggest effect on your credit score. A late payment can ruin your credit score, and your lender might come collect your vehicle. When you take a car loan, plan to make car payments on time. If you are late even for a single car payment, your credit score will drop and it will take longer time to build it back up.
Strive to improve your credit score, as it helps you get lower interest rates on loans. However, never forget the other loans that affect your credit score. Car loans aren’t the only thing the credit companies watch. If you default on other loan payments, the credit score is affected negatively. However, paying car payments on time will reduce your debt and increase your credit worthiness, so keep on top of them.
