Buying a car is an important part of life, but it can also have an impact on your credit score. How much you are willing to spend on your next car and how well your credit is managed will all influence whether you choose to finance it.
Getting a car loan can help you build or rebuild your credit history and improve your FICO Score. You can also refinance future mortgages and loans with a lower rate of interest by taking out a car loan.
How Does an Auto Loan Affect Your Credit?
Credit scores are based on a number of factors including payment history and length of credit history. Your credit score can be increased by having a long history of credit and making on-time payments.
Your credit score will consider your credit utilization rate, which is the ratio of your revolving credit to your total credit limit. Having too much revolving debt can lower your credit score, so it's important to keep your balances low and pay down your balances as soon as possible.
The credit mix is a second factor which affects your score. It represents the various types of debt you hold. The goal is to have a healthy mix of installment debt, like a mortgage or auto loan, and revolving credit, like credit cards.
Applying for new revolving credits, such as new credit cards, can help improve your credit score. However, you do not need to apply for them all at once. It could send a bad message to lenders about your financial situation.
The age and length of the credit history are also factors that affect your credit score. Your average account age can decrease after financing a new vehicle, and this can negatively affect your length-related score factors.
This can also have a negative impact on your variable amounts owed, which accounts for 30% of your score. Addition of a new installment credit to your report will increase the amount you owe.
People often pay off their auto loans early. But it can have a negative impact on your credit score, so it's important for you to think about how paying off your car loan will affect your credit before doing it.
Keeping your auto loan open with timely payments will have a positive impact on your length-related scoring factors, which accounts for 15% of your credit score. The average age of the account drops when you close a car loan because it's not considered an active account.
It is possible to improve your credit rating by getting a new loan. This will help you establish an excellent credit history, with a history of reliable payments. You should be aware that it may take some time for your credit score from a new car loan to improve.