Whether new or old, purchasing a car frequently requires you to take a car loan. A car loan can help you build credit, but it's not an overnight process. This might leave you thinking, "How fast will a car loan raise my credit score?". Well, it's primarily determined by what's currently on your credit report. Your credit score may suffer initially, even if you have excellent credit and a good payment history. If your credit history is more complicated, you may experience a larger dip first and larger benefits later.
Before the lender has even approved the loan, a car loan can impact your credit. This is because a hard inquiry shows up on your credit the day after or a few days after you apply for a loan.
Within 30 days of the start of the first billing cycle, the loan should be recorded on your credit report as being approved and finalized. This new credit may momentarily drop your credit score because the initial loan amount was probably sizable.
However, your debt-to-income ratio will drop as you repay the loan, and your credit score should return to normal. Know that a car loan can stay on your credit history even after ten years following its expiration.
Your credit score can spike up after you take a car loan. But your current credit report influences how long it will take to improve your score. And how much it will go up. If you already have a good credit report with good credit score factors, making timely payments can help you improve your credit score in the long run. Here are some credit score factors that need to be taken into account.
Payment history
A good payment history is a proof that you pay your bills on time and don't have any accumulated debts. And your payment history has a record of the following.
Amounts owed
The less you owe, especially on accounts that you can add to and take away from, more beneficial it is for your credit score. The amount you owe includes:
Length of credit history
Your credit history length is pretty much how old your credit is. It includes:
Your credit score can go up if you have a longer credit history.
Credit mix
This variable looks at how many revolving debts you have compared to your monthly debt. Revolving debts include credit cards, lines of credit, retail store cards, etc. Installment debt includes most fixed-term loans, like school, car, and mortgages. The goal is to have a mix of different kinds of credit that is pretty even.
New credit
Your credit score can go down if you get a lot of new loans, as this factor gets influenced by the following.
Even though your FICO credit score is based on a lot of different things, you may start to see your score go up in as little as 60 to 120 days (about 4 months). But keep in mind that everyone's credit is different, so your results may not be the same.
Here's how a car loan can help your credit score go up in the long run:
Making on-time payments
Paying your loan on time will look good on your payment history variable, which makes up 35% of your FICO Score. You should try to pay your car payment on time to avoid late fees, but as long as you pay it within 30 days of the due date, it won't hurt your credit score. When you pay your bills on time, your credit score increases over the long term. It can take months before you see a noticeable change in your score.
Balancing your credit mix
If all of your credit is open credit, which makes up 10% of your FICO Score, it could hurt your credit score. Adding a car loan to the mix could help your score a little bit. This can raise your score quickly because it starts working as soon as the new loan shows up in your report. The change will be small because it only makes up 10% of your credit score.
In the long run, getting a car loan can help your credit score. But the short-term effects of getting a new car loan may cause your credit score to drop at first.
Taking on a hard credit inquiry
Before giving you a car loan, the lender will do a hard search on your credit report. These hard inquiries hurt your new credit variable, which can cause your credit score to drop suddenly. FICO only looks at hard credit checks done in the last 12 months when figuring out your credit score; after 12 months, that search does not affect your credit score.
Adding a new account to your credit report
The same applies when you add a new vehicle loan to your credit report as it does when you add a new account to your credit report. This effect could be seen right away because it will happen as soon as the lender files your loan to the credit bureaus. The influence will be minimal and eventually disappear because only 10% of your FICO score is made up of new credit.
Shortening your length of credit history
Your credit history will be shortened whenever you disclose a brand-new auto loan on your credit report. The exact effect will vary depending on how old your other accounts are and how many you have. The adverse effect may start as soon as the lender reports your debt to the credit agencies. Fortunately, given the length of your credit history only influences 15% of your credit score, it probably won't matter much.
Increasing amounts owed
Your total debt grows when a new installment loan is reported to the credit bureaus. Your outstanding variable amounts, which are used to calculate your FICO credit score, may suffer as a result. This effect will be almost immediately felt, just like the others we've stated. Sadly, the amounts owing variable, which accounts for 30% of your credit score, can have a big impact. If you have already used a large portion of your available credit when you apply for a car loan, your credit score may appear significantly different.
You are probably wrong if you have assumed that your credit score is a single number based on your credit history and how much you use credit. In fact, you actually have three credit reports. Each of the three big credit reporting bureaus, Experian, Equifax, and TransUnion, gives out its own credit report. It will be different depending on which credit record is used to figure out your FICO Score.
Your credit report can be affected by information about your car loan, like the amount, terms, interest rate, and payment history, but it depends on what your lender tells the credit bureaus.
Not all lenders give loan information to all three credit bureaus and only the credit bureau that your lender reports will use your loan information to calculate your FICO score.
If you take out a vehicle loan for the first time, your credit score can quickly decline. That is completely normal. Your on-time monthly payments may improve your score as the loan term goes on. Although your score won't immediately go up, it should get significant over time.
The hard inquiry for your car loan should show up on your credit report the same day or within the next couple of days, regardless of whether you are getting approved or not. When you choose a dealership or car loan company to work with and finalize the deal, it can take up to 30 days from the start of the billing cycle for your loan to show up.
The first payment should show up on your report a few days after the full monthly payment is processed. This will start taking money off the total amount of your loans, which will show up in your DTI ratio.
Here are some ways to improve your credit score to buy a car.
It varies as everyone's credit is different. Here are some pointers on how long it usually takes for your credit to recover from certain credit problems.
| Event | Average credit score recovery time |
|---|---|
| Bankruptcy | 6+ years |
| Home foreclosure | 3 years |
| Missed/defaulted payment | 18 months |
| Late mortgage payment (30 to 90 days) | 9 months |
| Closing credit card account | 3 months |
| Maxed credit card account | 3 months |
| Applying for a new credit card | 3 months |