Getting a car loan, and consistently making payments on it, can help build your credit. Opening the loan itself wont have much impact, but building a history of on-time payments is a great way to promote credit score improvement.
While getting a car loan in and of itself wont necessarily impact your credit scores much, responsibly managing a car loan can. Making regular, on-time payments on a car loan can help you build credit and improve your credit scores.
Buying a new car is an exciting experience. Driving off the lot with that new car smell can make you feel like you’ve really made it. But that excitement can fade once the reality of car payments sets in. Luckily, making consistent on-time car payments can actually help increase your credit score.
How Car Payments Affect Your Credit Score
When you take out an auto loan, it impacts your credit in a few key ways:
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A hard inquiry when applying for the loan may cause a small temporary drop in your scores. Multiple inquiries from rate shopping should be counted as just one inquiry by the credit bureaus.
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Opening the installment loan can improve your credit mix since you’ll have both revolving (credit cards) and installment loan types. This accounts for 10% of your FICO Score.
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Most importantly, a history of on-time car payments will build your credit since payment history makes up 35% of your FICO Score.
So while getting the auto loan itself may cause a slight drop from the hard inquiry, you can offset that by making regular monthly payments on time.
How to Use Car Payments to Improve Your Credit
The key is to make sure your car payments are made before the due date each month. Payment history is the biggest factor in your FICO Score. Just one 30+ day late payment can significantly hurt your credit scores.
Here are some tips to ensure you don’t miss payments:
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Set up automatic payments or payment reminders through your lender so you don’t forget
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If you may have trouble making a payment ask your lender about deferment or forbearance options before you become delinquent.
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Pay more than the minimum when possible to pay down the principal faster. This will reduce the length of the loan and your overall interest costs.
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Make payments frequently, even weekly or bi-weekly. This builds your payment history faster.
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Pay down balances on any credit cards you have to keep utilization low. This accounts for 30% of your credit score.
How Long It Takes to See Your Credit Score Increase
There’s no set timeline for credit score improvement. After opening your auto loan, you may see a small drop from the inquiry. But as you begin making consistent monthly payments, you should see your scores start to increase.
The longer you make on-time payments, the more your scores will benefit. Your payment history starts aging and contributes more to your scores over time. Any late payments will interrupt this process.
You can check your credit score frequently to monitor your progress. Improving credit takes patience and diligence. But staying committed to on-time payments will pay off both financially and in terms of your credit.
Other Ways to Build Credit Alongside Car Payments
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Become an authorized user on someone else’s credit card to build payment history.
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Open a secured credit card if you don’t qualify for unsecured cards yet.
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Use Experian Boost to add on-time utility payments to your credit file.
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Keep credit card balances low to maintain credit utilization under 30%.
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Consult with a nonprofit credit counseling agency if you need debt help.
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Check your credit reports and dispute any errors that could be weighing down your scores.
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Mix different credit types like installment loans and credit cards.
The Bottom Line
Making consistent on-time car payments over time demonstrates responsible credit habits and will likely increase your credit score. Be diligent about paying by the due date each month. Combining this with other credit building tactics can help maximize your credit score improvement. Check your credit score frequently so you can monitor progress and address any issues early on.
How to Use a Car Loan to Build Credit
The key to building credit with an auto loan, or any other installment loan, is to prove you can and will make your payments on time every month, as spelled out in your loan agreement.
Payment history is the largest single factor that influences credit scores, responsible for about 35% of your FICO® Score. Regular on-time payments play a big role in promoting credit score improvement, while just one payment thats overdue by 30 days or more (also known as a delinquency) can do significant harm to your scores.
By doing whatever it takes to get your payment in by your monthly due date, youll tend to see steady improvement in your credit scores.
If remembering to make your payments on time is a concern, here are some tips for making sure youre not late:
- Take advantage of technology. Theres a good chance your lenders website or app can help you stay on top of your payment deadlines. Most lenders enable you to set up text or email alerts to remind you when payments are due. Many creditors also provide automatic payment options that can transfer funds on the appointed day each month without any additional action on your part. If you go the autopay route, just take care that there are sufficient funds in your checking account so you avoid accidental overdrafts.
- Be proactive if payments are in doubt. If you think you might not be able to afford a payment, reach out to your lender immediatelyâideally before you miss a deadlineâto discuss alternatives. Depending on the situation, you may be able to defer a payment or arrange a temporary forbearance period, during which your payments are temporarily reduced or suspended. Note that in a deferment or forbearance arrangement, youll be expected to make all payments in full, usually with additional interest charges.
Does a Car Loan Help Build Credit?
Steady, timely payments are the key to building credit with a car loan. Merely opening a car loan typically wont have a big effect on your credit scores, but it could have some minor impacts:
- Opening a car loan might cause a small, temporary decline in score in response to the hard inquiries made when you applied for the loan.
- On the other hand, accepting a car loan could give your credit scores a small boost, by improving whats known as your credit mix. Lenders value borrowers ability to manage both installment loans (such as car loans) and revolving credit (such as credit cards), and credit mix is a credit scoring factor that encapsulates that skill. Credit mix accounts for about 10% of your credit score, so your FICO® ScoreΠand VantageScore® credit scores could increase a bit, especially if your car loan is the only open installment loan on your credit report.
How a Car Loan Affects Credit Score – Auto loans raise or lower scores? How fast? How many points?
FAQ
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