How Much Will a Car Loan Hurt My Credit Score (2024)

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How Much Will a Car Loan Drop My Credit Score?

Most credit scoring systems allow people to shop for the best rates on car loans without having a negative impact on their credit scores. They do so by counting all inquiries for auto loans within a given period of time as a single inquiry.

So, if you were asking yourself, “do multiple car loan applications hurt your credit?” the answer is yes, but not by a lot.

Shopping for rates within a 14-day period will ensure inquiries are counted as only one for scoring purposes, or excluded entirely by some scoring systems, according to the credit bureau Experian.

Credit Union of Southern California (CU SoCal) provides checking, savings, and auto loan products with quick pre-approvals, no application or funding fees, and more. Please note we do not offer Membership or loans to non-California residents (other than former CA residents who were already Members or Preferred Partner Members working in out of state locations).

Call CU SoCal at 866.287.6225 to schedule a free no-obligation auto loan consultation, or apply online today!

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Factors That Influence Your Credit Score

Several factors affect an individual’s overall credit score. As we go through life and acquire and use different types of credit, these experiences will make our score fluctuate over time.

Generally, large fluctuations up or don’t won’t happen unless we take on large credit like a home mortgage, or fail to pay a mortgage or car loan.

Here’s how FICO (the most popular credit scoring model, used by most lenders when evaluating an applicant's creditworthiness) ranks these various factors:

Payment History: 35%
The first thing any lender wants to know is whether you've paid past credit accounts on time. This helps a lender figure out the amount of risk it will take on when extending credit. This is the most important factor in a FICO Score. Be sure to keep your accounts in good standing to build a healthy history.

Amounts Owed: 30%
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. However, if you are using a lot of your available credit, this may indicate that you are overextended—and banks can interpret this to mean that you are at a higher risk of defaulting.

Length of Credit History: 15%
In general, a longer credit history will increase your FICO Scores. However, even people who haven't been using credit for long may have high FICO Scores, depending on how the rest of their credit report looks.

New Credit: 10%
Research shows that opening several credit accounts in a short amount of time represents a greater risk—especially for people who don't have a long credit history. If you can avoid it, try not to open too many accounts too rapidly.

Types of Credit (Credit Mix): 10%
FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don't worry, it's not necessary to have one of each.

Other Debt That Affect Your Credit Score

Installment Loans: This type of debt is any that is paid in installments, usually monthly payments, including a car loan, mortgage, student loan, or personal loan. Paying down installment loans is a good sign that you're able and willing to manage and repay debt.

Revolving Credit: The most popular type of revolving credit is credit cards. Other examples include a Home Equity Lines of Credit (HELOC) and Personal Loans. This type of credit can be drawn from, paid off, and used again. When used responsibly, revolving credit can help you manage your cash flow and build a good credit score—both of which are key to a healthy financial life.

Does Applying for a Car Loan Affect Credit?

The credit experts at Experian tell us that when you apply for loans to shop for the best rate, each lender you apply with will request a credit check that causes a hard inquiry to be entered on your credit report. This typically causes a small reduction in your credit score. If you qualify for and accept a loan offer, you'll typically see another small score dip.

Hard inquiries will reduce your credit score anywhere from 5-10 points for about a year. For most people, this won’t have a negative impact on ability to borrow and get other loans, especially if you will make on-time payments to you new loan, which will raise your credit score. However, if your credit score is on the border of being "average", "good," or "excellent," and you want to make another large purchase within the same year (e.g., buying a house), 10 points and several hard inquiries could work against you, so be cautious about taking out new credit if you plan on applying for a mortgage in the same year.

A New Loan May Lower the Average Age of All Your Accounts

Financing a car purchase can cause the average age of your accounts to fall. This is because the length of your credit history and the age of your accounts are 15% of your FICO score. When you take out new credit, the average age of all your accounts will drop slightly. For people with many accounts, the drop is small. For people with only one or two accounts the drop will be larger. The good news is that as you make on-time car loan payments your credit score will increase.

Car Loan and Credit Utilization

An auto loan will not have an affect on your credit utilization score. Credit scores are highly sensitive to your credit utilization ratio—the amount of revolving credit you're using relative to your total credit limits—and a utilization ratio over 30% can hurt your credit score. To figure out your utilization rate, divide your total credit card balances by your total credit limits. For example, if you have a credit card with a $9,000 limit, a $3,000 balance would put you at 30% utilization.

So, does getting a car loan hurt your credit? Only temporarily, so don’t worry!

How an Auto Loan Can Improve Your Credit Score

Buying a car using an auto loan will cause a small dip in your credit score, however paying the mainly loan payments on time over the full course of the loan will have a greater positive impact on your credit score. Your score will increase among all of the factors the contribute to credit score as the loan adds to your payment history, amounts owed, length of credit history, new credit, and credit mix.

For more details, read our article: How Fast Will a Car Loan Raise My Credit Score.

Why Savvy Consumers Choose CU SoCal

For over 60 years, Credit Union of Southern California has been proudly serving Southern California families. We are the fastest growing credit union in Southern California!

Please note CU SoCal does not offer car loans to individuals with FICO scores below 600, nor to non-California residents (other than former CA residents who were already Members or Preferred Partner Members working in out of state locations).

Apply for a CU SoCal Auto Loan Today!