How Buying a Car Affects Your Credit Score

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Purchasing a new car can be expensive and time-consuming, especially when you consider the time spent shopping for financers, completing the application process, and choosing the vehicle. Even so, some people find more benefits than having transportation when they purchase a new car. It can also be good for your credit score.

The Immediate Effects

When you decide to purchase a car, the most immediate effect your credit score will see is a slight drop in points. However, this shouldn’t alarm you. It occurs because the financiers pulled your credit score, which always temporarily lowers a person’s score. This isn’t a long-term reflection on your credit report, so it shouldn’t deter you from looking for a new car when you need or want one.

The Long-Term Effects

Despite having a negative effect on your credit score in the short term, the long-term effects of buying a car can be optimal for creating a better credit score. However, the optimal effect depends on you doing your part. This means paying your car loan payment on time and in full every month. Over time, your points will begin to climb as the personal credit unions realize you are taking the repayment of your loan seriously.

Purchasing a new car

How a Car Loan Appears on Your Credit Report

To help you understand how purchasing a part affects your credit score, it is important to know how it will show up on your credit report. Most people feel a bit overwhelmed when looking at their credit report but knowing what to look for can ease some of the stress.

First, know what type of an account an auto loan is. It is known as an installment account, which means that it falls into the same category as student loans or mortgages. Installment accounts are based on payments of the same amount for a set period of time. Your credit report depends on a mix of different types of credit, so if you don’t already have an installment loan, a car loan could improve your score.

You’ll also need to understand what the current status means. If you are paying your monthly payment on time every month, the status of your loan will show as “paid as agreed” or “current.” Staying current on your payments is the best way to improve your credit score since timely payments are the biggest influence on your credit. If you fall more than 30 days behind, you can diminish your score significantly, not to mention risk having your car repossessed.

Tips for Car Shopping

Of course, shopping for a car the right way is also important for ensuring your experience is more beneficial than detrimental to your score. Remember, applying for a car loan will show up on your credit inquiries and temporarily lower your score. However, you need not be worried. Allowing multiple lenders to run your credit score within a 30-day period will usually only count as one on your FICO score. Additionally, the drop in your credit score is only temporary, so you don’t need to worry about causing any permanent damage.

Other Ways to Improve Credit Quickly

Of course, if you don’t really need a car but do need to improve your credit score, there are other ways to do it. One of the simplest methods is to keep credit cards, use them, and pay the bills on time each month. However, be sure not to max them out and do your best to keep your available credit at 70% or more.

No matter what you do, make sure you aren’t rushing through the process. Establishing credit with a car won’t work if you accidentally sign up with an unscrupulous lender and end up in a bad financial situation. Verify that companies are legitimate and have good reviews before signing on the dotted line.


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