This is question we were asked over the phone the other day. It isn’t the first time we have been asked it either, so it thought to make a good subject for a blog post.
So can an auto loan help improve your credit score?
Yes and no.
Auto loans and your credit score
As you will know by now, your credit score influences the likelihood of you being accepted for a car loan and the interest rate you’ll pay. The higher your score, the more lenders who will lend to you and the lower the interest rate you’ll be charged.
Positive impacts on your score
Once you have an auto loan, it can positively impact your credit score by providing important metrics to help the score rise.
Paying your auto loan on time, all the time will positively impact your payment history. This can make up 50% of your credit score so is very influential.
It can also positively impact the credit mix and credit age eventually and to a lesser degree.
Don’t expect your score to shoot up by treble figures with just an auto loan but you can feasibly expect some improvements in your score over time.
Negative impact on your score
There will also be a slight negative impact if you take out an auto loan. First, your credit score will dip slightly as you take out a new loan until you have demonstrated you can pay it.
Think of it like a collective holding of breath. Will they pay their loan on time? Will they default? Once you have a couple of successful payments behind you, your credit score will recover.
Other potential negative impacts include an increase in your debt utilization ratio as you have borrowed more and the impact of any hard inquiries.
In the old days of auto loans, a loan application would be sent to several lenders at once who would all consider your loan. Each would make their own hard inquiry on your credit history to check you out, which would leave a mark.
Newer credit reporting systems collect all these inquiries and count them as a single one rather than several independent inquiries. This lessens their impact.
Some credit systems don’t even count auto loan inquiries at all!
So yes, in principle, an auto loan can improve your credit score. It is not a reason to get a loan unless you also need a car though. We have much cheaper ways of rebuilding credit!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!