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Getting a car loan could potentially raise your credit score, but only if you pay the car note on time each month. When you first get an auto loan, your credit score may not go up at all. Credit scores are calculated based on a few distinct factors, so it depends.
Overall, a car loan could be helpful to your credit score so long as you’re in need of a car and are financially able to manage the loan. Continue reading to learn more about how fast a car loan can raise your credit score.
Does buying a car help your credit score?
Buying a car can only help improve your credit score if you take out an auto loan. An auto loan is a type of installment loan that involves the borrower making monthly payments (often with a fixed interest rate) over a period of time. Once the loan term ends, the loan will be paid off and no more payments are required.You can obtain an auto loan from a traditional bank, credit union, or from a company like Upstart.
Buying a car can help your credit score because an auto loan serves as an additional type of credit account. Your credit score is calculated by a few different factors including payment history, total credit utilization, and credit (account) mix, just to name a few.
Adding a car loan could improve your credit mix rating if you have other types of loans such as a student loan or mortgage along with a few credit cards. Another way a car loan can help improve your credit score is by building a positive payment history.
Each month, your payments and balance are reported to the three major credit bureaus. So long as you pay your car payment on time, this positive payment history will be recorded and it can help increase your score. Also, you may notice your credit score increase as your car loan balance gets smaller as this might indicate that you are utilizing less of your available credit and lowering your debt-to-income ratio. According to TransUnion, one of the three major credit bureaus, your credit score is updated every month to 45 days as new information is provided by your creditors.
If you are looking for other ways to improve your credit score you can use a financial wellness app like Brigit that offers credit building services and loans.
Will an auto loan impact all of my credit reports?
While many lenders report auto loans to all three major credit bureaus, some only report to one or two. Be sure to ask your lender if they report to all three major credit bureaus. That way, you can keep a more consistent credit rating across the different bureaus.
If your auto loan doesn’t show up on a credit report, this could cause a bigger variance of your score depending on where you go to check it. Know that you can always ask your lender to report payment to each credit bureau so you don’t miss out on the positive payment history.
How long does a car loan affect your credit?
A car loan doesn’t stay on your credit report forever if you end up paying the loan off entirely. When you open the credit account, the auto loan will show up on your credit report and remain as long as there are payments to report. Sometimes the account remains on your credit report for several years.
At Experian, for example, a paid off auto loan can remain on your credit report for up to 10 years after the final payment so long as there is no negative payment history to report. If the account had late payments before it was paid off, those negative marks could remain on your credit report for up to 7 years.
You may notice a slight decrease in your credit score once you pay off your car loan. This is usually due to the fact that you are no longer actively making payments on the account but the impact on your credit is usually minor and temporary.
Depending on how well you manage your car loan, it can negatively or positively impact your credit score over time. Knowing how a car loan can affect your credit score and report can help you determine when you’ll consider an auto loan and how best to manage it.
This story was written by NJ Personal Finance, a partner of NJ.com. The information presented here is created independently from the NJ.com editorial staff, and purchases made through links in this article may result in NJ.com earning a commission.
