If youâve only had credit cards and are considering your first car loan, you may want to know how fast a car loan could build your FICO® credit score.
So, does a car loan affect your credit score, and can a car loan build your credit? Keep reading to learn more about how car loans show up on your credit report and influence your credit score so you know what to expect.
Getting a car loan can be an exciting experience. You finally have the chance to get the vehicle you’ve been dreaming about But a car loan can also help you in another big way – by boosting your credit score. So just how much of a boost can you expect from getting an auto loan? Let’s take a closer look
The Potential Impact of a New Car Loan
When you take out a new car loan, it won’t automatically give your credit score an instant boost. In fact, initially your score may drop a few points due to the hard inquiry when you apply for the loan. However over time as you make regular on-time payments a car loan can improve your credit in several key ways
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Payment history (35% of your score): Making consistent monthly payments on time is the best way to boost your score with a car loan. This payment history makes up over one-third of your FICO score.
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Credit mix (10% of your score): Having both installment loans (like a car loan) and revolving credit (like credit cards) shows lenders you can manage both types responsibly.
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Credit utilization (30% of your score): If your car loan allows you to consolidate debt from high-balance credit cards, your overall utilization rate may improve.
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Credit history length (15% of your score): The longer you have accounts open, the better. Keeping a car loan open for several years can extend your credit history.
So while a new car loan won’t immediately improve your credit score by any certain number of points, it can have a positive influence in all of these key areas over time.
How Fast Could My Credit Score Improve?
You may be wondering – just how quickly could my credit score start to benefit from a new car loan? Here’s a general timeline:
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1-3 months: The hard inquiry from your loan application will stop negatively impacting your score. On-time payments will start positively impacting your payment history.
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6 months: Your new account will be fully factored into credit scoring models. Your score should reflect the positive payment history you’ve built so far.
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12 months: With a year of consistent on-time payments, you should see a nice boost to your score. Some models give more weight to 12 months of history.
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24 months: Two years of on-time payments will solidify the positive impact to your score. Your credit mix and history length will also benefit.
So while you may see small improvements within a couple months, the biggest boost will come between 1-2 years as you build a strong payment history with the new account.
How Big of a Credit Boost is Realistic?
Could a new car loan improve your credit score by 50 points? 100 points? More? It really depends on your individual credit situation:
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If you have a short/poor credit history, opening a new installment loan like a car loan can boost your score significantly since you’re demonstrating responsible behavior. Gains of 50+ points within the first year are possible.
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If you already have good credit, a new car loan will help keep your score strong but gains may be closer to 10-25 points as you build payment history.
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If your credit recently took a hit (from maxing out cards or missing payments), a new car loan with perfect payments can help restore your score. But full recovery takes time.
The better your payment history with the car loan, the more your score stands to benefit. To maximize improvements, make sure you pay on time every single month.
Other Ways a Car Loan Can Help Your Credit
Beyond direct score improvements, getting a car loan can also help your credit in other ways:
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Consolidating high-interest debt like credit cards can make monthly payments more manageable. This helps ensure on-time payments.
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Qualifying for better rates on future credit since you’ll have a lower debt-to-income ratio and improved credit scores.
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Learning responsible credit habits like budgeting for fixed monthly payments. This sets you up for success with future loans.
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Building a relationship with the lender for easier approval on future loans like a mortgage.
So in addition to the credit score boost, a car loan can provide other benefits that allow you to better manage your overall financial health.
Tips for Maximizing the Credit Benefits of Your Car Loan
If you’re planning to get a car loan, keep these tips in mind to make sure it provides the maximum boost to your credit:
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Shop for the best rates within a 14-day period to minimize hard inquiries.
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Make payments on time every single month – set up autopay if needed.
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Pay more than the minimum when possible to pay down the principal faster.
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Try to get a loan term of 3 years or less to build history quickly.
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Keep the loan open until fully paid off if you can afford to.
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Contact the lender immediately if you’ll be late or miss a payment.
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Limit new credit applications while paying down the loan balance.
Following these tips will ensure your new car loan gives your credit score the biggest boost possible. Careful management of your loan can improve your credit by 50 points or more!
Summary: Monitor Your Credit as It Improves
Getting approved for a car loan is a big achievement. Not only do you get the car you want, but you also open the door for your credit score to start improving right away as you make on-time payments each month.
Track your credit score with free monitoring services so you can watch it gradually increase. Within 6-12 months you should see noticeable gains, with the full benefits coming in 1-2 years. If you manage the account responsibly, a car loan can boost your credit score by 50 points or more!
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If youâve only had credit cards and are considering your first car loan, you may want to know how fast a car loan could build your FICO® credit score.
So, does a car loan affect your credit score, and can a car loan build your credit? Keep reading to learn more about how car loans show up on your credit report and influence your credit score so you know what to expect.
How long does it take for car payments to improve credit?
When you sign up for a new car loan, it may probably hurt your credit score at first. But that negative impact may be only temporary. [1]
Hereâs what happens to your credit when you get a new car loan:
- New inquiries: The first ding to your credit rating happens before you even open a credit account. By applying, the lender will likely request a copy of your credit score and credit report. Each inquiry related to a new credit application is called a hard credit inquiry on your credit report and may have a small negative impact on your FICO credit score. Hard inquiries remain on your credit report for two years.
- New credit account: When you open a new account, youâre adding a brand new credit account to your credit report with no payment history. Again, this has a temporary negative result for your credit rating. [2]
- Lower average account age: One credit score factor that accounts for 15% of your FICO score is your average age of credit (meaning how long youve had credit lines). Adding a new account lowers your average age, which could cause a credit score drop.
The impact of opening a new credit account varies depending on your unique credit history. If you apply for several car loans in a short period of time to shop around, credit scoring models may treat the group of inquiries as a single inquiry for credit scoring purposes. [3]
After a few months of making your on-time payments, however, you will have an established account with a payment history. At this point, you may see the negative impacts of the new account turn into a benefit because of your new on-time payment history.
How a Car Loan Affects Credit Score – Auto loans raise or lower scores? How fast? How many points?
FAQ
How much will a car loan raise my credit score?
How can I raise my credit score by 100 points in 30 days?
How fast does a car build credit?
How Fast Will a Car Loan Raise My Credit Score? You probably won’t see a boost overnight, but you can expect to see some movement after a few months—usually within 3 to 6 months if you’re making payments consistently.
Will buying a car improve my credit?