If you’re considering taking out a car loan, you might be wondering how it will affect your credit score. Here’s what you need to know.
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How credit scores work
Your credit score is a number between 300 and 850 that lenders use to determine your creditworthiness.Credit scores are based on five factors: payment history, credit utilization, length of credit history, credit mix, and new credit.
The different types of credit scores
Credit scores are like report cards that tell potential lenders how well you manage credit. Just as with school grades, higher credit scores mean you’re managing credit well, while lower credit scores mean there’s room for improvement.
There are lots of different scoring models out there, but the two most commonly used in lending are FICO® Scores and VantageScore®. Here’s a quick rundown on both:
FICO® Scores are used in about 90% of U.S. lending decisions, according to Fair Isaac Corporation, the company that designed the scoring model. There are three different FICO® Score versions: Base (also known as Classic), Bankcard and Installment Loan. Base FICO® Scores range from 300 to 850; Bankcard and Installment Loan FICO® Scores range from 250 to 900. The higher your score, the better your credit health is considered to be.
VantageScore® is the other main scoring model used by lenders. It was created jointly by the three national credit reporting companies — Equifax®, Experian®, and TransUnion® — so it has a slightly different format than a FICO® Score. VantageScores also range from 300 to 850, with higher scores indicating better credit health.
How car loans affect your credit score
Auto loans are a great way to build credit, but they can also have a negative impact on your credit score if you’re not careful. Here’s what you need to know about how car loans affect your credit score, and how to make sure your loan helps rather than hurts your credit.
The most important factor in your credit score is payment history, so it stands to reason that late or missed payments on a car loan would have a negative impact on your score. However, even one late payment can drop your score by 100 points or more, so it’s important to stay on top of your payments.
Another factor that comes into play is the amount of debt you have compared to the amount of credit available to you. This is called your “credit utilization ratio,” and it has a big impact on your credit score. If you’re maxing out your car loan and leaving very little available credit, that can hurt your score.
Fortunately, there are things you can do to offset the negative impact of a car loan on your credit score. First, make sure you make all of your payments on time, every time. Second, try to pay down the balance of your loan as quickly as possible. And third, keep an eye on your credit utilization ratio by using other forms of borrowing sparingly. By following these tips, you can make sure that your car loan helps rather than hurts your credit score.
How much will a car loan drop my credit score?
The effect of a car loan on your credit score
A car loan will have a small, positive effect on your credit score as long as you make your payments on time. However, if you miss payments or default on the loan, it will have a negative effect on your credit score. Additionally, the amount of the loan and the interest rate you pay will affect your credit score. A higher loan amount and interest rate will have a more negative effect on your credit score than a lower loan amount and interest rate.
How to improve your credit score
Assuming you have a good credit score to begin with, taking out an auto loan is unlikely to have a significant impact on your credit score. In fact, if you make your payments on time and in full each month, your credit score may actually improve.
If you have bad credit, however, taking out an auto loan can further damage your credit score. This is because lenders are more likely to view you as a high-risk borrower and may charge you higher interest rates or require a larger down payment. If you’re not able to make your payments on time, this will also reflect negatively on your credit score.
Overall, the best way to improve your credit score is to make all of your payments on time and in full each month. You can also try to reduce your overall debt load by paying down your other debts, such as credit cards or student loans.