If you can get approved, an auto loan is an effective credit-building strategy. Especially if you have bad credit. This is because on-time payments are consistent. While auto financing can improve your credit score, it can also hurt you.
Late or late payments will negatively affect your payment history factor and could significantly lower your credit score. Add a thorough review to your credit report, which could temporarily lower some points on your score. Refinancing a car has a similar effect on your credit. Every payment you make for your loan is reported to each credit agency.
If you make a timely payment on your car loan every month, you'll see an increase in your score in key milestones, such as six months, one year and eighteen months. These temporary changes to your credit report will begin to disappear as you continue to make your auto loan payments. If you don't include an installment loan in your credit report, getting an auto loan could help your profile by creating a better credit mix. When you leave the car dealership parking lot with your new vehicle, you probably don't think much about the car loan you just signed or how it might affect your credit.
Remember that if you fall behind on your monthly payment or don't pay your car loan, the co-signer is likely to get the same mark of negative payment history on their credit history. Since a portion of your credit score is obtained from a “credit combination,” getting an auto loan can help your credit profile if you don't already have an installment loan. If you don't pay the loan, you'll likely end up collecting the loan and regaining possession on your credit report, which can cause a drop in your FICO score. All inquiries made to get an auto loan will appear on your report, but most credit rating systems will combine several inquiries so that they only count as one.
You should reduce your credit card and loan balances to no more than 30% of your total credit limits. As you search for the lowest rates for car loans, you can allow several lenders to perform credit checks and end up with several difficult inquiries that appear on your credit report. If you only have revolving debts, adding an auto loan balances the types of credit accounts listed on your report. Once you've built up a credit history, you can switch your credit card to more favorable and secure car financing.
So, if you want to maximize the impact of your car loan on your credit score, it's best to continue making monthly payments. An auto loan can help improve your credit score if you make your monthly loan payments on time and in full. Every time you apply for a car loan, the lender thoroughly researches your credit report to see what rates you qualify for.
