Car buying is an important life decision. However, it can also impact your credit score. Your decision on whether or not to use a car-loan for your next purchase will depend on a number of factors.
A car loan will help you improve your FICO score and build your credit history. A car loan may also enable you to refinance a mortgage or other loans in the future at a lower-interest rate.
How Does an Auto Loan Affect Your Credit?
Your credit score is based on many factors, including your payment history and the length of your credit history. Having a long credit history and on-time payments can increase your credit score.
Credit utilization ratio is one of the most important factors that determines your credit score. This ratio measures the amount of debt you have revolving compared to your total limit. Too much revolving balance can negatively affect your credit rating.
Credit mix is also a factor in your credit score. It reflects all the types of credit that you have. A healthy balance of installment debts like a car loan or mortgage and revolving loans like credit cards is the goal.
You can improve the mix of your credit by applying for new revolving debt, like a card. However, it is not necessary to apply for everything at once. This could send the incorrect message to lenders, that you are in financial difficulty.
The length of your credit history and the age of your accounts is also important to your credit score. If you are financing a brand new car, the average age of each account may drop slightly. This could have an adverse impact on your length related scoring factors.
It can also negatively affect your amounts owed variable, which makes up 30% of your credit score. Adding a new installment loan to your credit report increases the total amount you owe.
It is common for people to pay off their car loan 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.
Your credit score will be positively affected if you keep your auto loan active and pay on time. The length-related scoring factor accounts for 15%. The average age of the account drops when you close a car loan because it's not considered an active account.
Getting a new car loan can have a positive impact on your credit score as it helps you establish a strong credit history with reliable payment history. You should be aware that it may take some time for your credit score from a new car loan to improve.