How a Car Loan Impacts Your Credit Score
Cars are expensive investments, so you might require a loan to pay for the vehicle. If you’ve borrowed money before, you know how nerve-wracking it can be. One fear you may have is that the car loan will deplete your credit score. Before applying for a car loan, learn the truth about how car loans can impact your credit score.
The Initial Drop in Credit Score
Applying for any type of loan can bring down your credit score. It signals to lenders that you’re in need of funds to support a purchase. The real question is how much it will drop. The decline depends on your payment history.
The Importance of Payment History
If you’ve taken out loans and used credit cards in the past, you have a payment history. Timely payments can increase your credit score. After taking out a car loan, you’ll likely experience a small credit score decrease of 1–5 points.
Inadequate payment history can have a stronger impact. Debts, accumulated late fees on credit cards or loans, and minimal payment history can negatively affect your credit score when applying for a car loan. Once you send in an application, the score might reduce by 5–15 points.
Apply for loans sparingly. Have a good understanding of your payment history, credit score, and what you can pay each month. When you find a lender with the best deal, send in an application to avoid taking a great hit to your credit score.
A Credit Score Boost Over Time
The credit score deficit doesn’t last forever! Once the initial drop occurs and you start sending loan payments, your credit score will slowly rise. Consistent payments are the best way to improve your payment history and increase your credit score for future endeavors.
Missing payments and accruing late fees won’t provide the credit score boost you’re looking for. Instead, it will bring down the number further.
Make timely payments to ensure your car loan doesn’t impact your credit score. As you pay off the loan, your credit score will gradually increase and leave you with a higher value than before!
A credit score decline is only temporary. Whether you’re buying a new or used vehicle, GFA Federal Credit Union has a credit union auto loan readily available to support your endeavors. While you pick out the car you love, our Better Banking Representatives will assist you in reaching your financial goals.