The purchase of a vehicle is a major life event, but can also affect your credit score. Whether or not you buy your next vehicle with a car loan can depend on several factors, including how much you want to spend and how well you manage your credit.
A car loan will help you improve your FICO score and build your credit history. In addition, taking out an auto loan can allow you to refinance your mortgage and other loans at a lower interest rate in the future.
How does an auto loan affect your credit?
Your credit rating is based upon many factors, such as your payment history and credit history. Credit scores can be improved by a good credit history.
Credit utilization ratio is one of the most important factors that determines your credit score. This ratio measures the amount of debt you have revolving compared to your total limit. Too much revolving credit can affect your credit score. It's best to keep balances low, and pay off your debts as quickly as you can.
The credit mix is a second factor which affects your score. It represents the various types of debt you hold. It is important to maintain a balance between installment debts, such as a mortgage, auto loan or credit card, and revolving credits, like credit cards.
Applying for new revolving credits, such as new credit cards, can help improve your credit score. However, you do not need to apply for them all at once. It could send a bad message to lenders about your financial situation.
The length of your credit history and the age of your accounts is also important to your credit score. If you are financing a brand new car, the average age of each account may drop slightly. This could have an adverse impact on your length related scoring factors.
It can also negatively affect your amounts owed variable, which makes up 30% of your credit score. Adding a new installment loan to your credit report increases the total amount you owe.
Most people will pay their auto loan off early. This can impact your credit rating, so you should think carefully before paying your car loan off early.
Maintaining your auto loan with timely payments can have a positive effect on the length-related score factors that account for 15% your credit rating. Your average account age drops when you close an auto-loan because it is no longer considered a live account.
A new car loan will have a positive effect on your credit rating as it allows you to establish a good credit history. However, you should keep in mind that it can take a while for your credit score to improve from a new auto loan.