Does financing a car lower your credit score?

When you first get an auto loan, you may see a slight drop in your credit ratings because you're taking on significant new debt. However, as you start making on-time loan payments, your credit score should recover. Every time you apply for a car loan, the lender thoroughly researches your credit report to see what rates you qualify for. These difficult questions can temporarily reduce points from your score.

And they can stay on your credit report for up to two years. The good news is that if you make several difficult inquiries in a short amount of time, they usually only count as one query. For example, FICO counts all difficult inquiries made within 30 days as a single query. Now that you know why you should have a good credit score, let's talk about how financing a car can help you achieve that.

If you have the money to pay off your car loan early and, in particular, if your interest rate is high, you may want to. If you decide not to dedicate the money to paying off your loan, but you're concerned that the interest rate will be high, you may be able to refinance your car loan and save money. Try not to extend the duration of the loan when you refinance, unless your finances have changed and the previous payment has become unmanageable. If you're thinking about financing a car, make sure you understand the process and are able to make payments.

Once you pay off your loan, you could lose points if you don't have other installment accounts because another factor in your credit score is the “credit mix.” The best scores are given to people who have a long history of making timely payments on installment loans and credit cards. You need it for everything from getting a good interest rate on loans to saving money on car insurance. On the other hand, a poor credit score can make it difficult to approve loans and lead to higher interest rates and charges. Getting rid of your car payment can definitely free up some cash each month, but it could hurt your credit rating.

The Federal Reserve measure has a ripple effect and usually causes rates to rise on a variety of consumer loans and lines of credit (and in some savings accounts). If your loan is backwards (meaning you owe more than the car is worth), you may be able to exchange it for a new one and transfer the negative principal to a new loan. And if you're having trouble making payments for your car, there are options available to help you get back to normal. If you have good credit, you may be eligible for a lower interest rate by refinancing your loan.

Cooper Williams
Cooper Williams

Professional bacon scholar. Passionate travelaholic. Professional pop culture guru. Evil social media ninja. Proud pizza nerd. Wannabe tv trailblazer.