If you’re looking to improve your credit score, buying a car might not be the first strategy that comes to mind. Many people assume that purchasing a new vehicle will hurt their credit. However, in many parts of the United States, having a car is essential for daily life. While buying a car may seem like a big financial commitment, when done correctly, it can actually help improve your credit score. In this post, we’ll explain how making a smart car purchase can boost your credit and help you reach your financial goals.
How Credit Scores Work
Credit scores are numerical indicators of your creditworthiness, typically ranging from 300 to 850, with higher scores reflecting better credit health. These scores are determined by several factors, including your payment history, credit utilization, the length of your credit history, the types of credit accounts you have, and recent credit inquiries. Lenders rely on credit scores to evaluate the risk of lending, with higher scores often leading to more favorable loan terms and lower interest rates. Maintaining a good credit score can unlock better financial opportunities, while a lower score may result in higher borrowing costs or difficulty securing loans.
Does Buying a Car Lower Your Credit Score?
Initially, your credit score might see a temporary setback when you first buy a car. For instance, one of the biggest factors in your credit score is your payment history. When you first purchase a car, you haven’t had the chance to establish a payment history for that account, so your credit score may experience a slight dip
Another factor to be wary of are the hard inquiries that lenders will undertake. Hard inquiries are when lenders pull your credit profile to base your approval from. Hard inquiries tend to take around five points off of your score, and if you have multiple hard inquiries within a short period of time, your score can drop even more. It’s important to remember that hard inquiries only affect your credit score for about a year and will eventually fall off of your credit score
Remember: In almost all cases, your credit score will not only rise to its previous level quickly, but as long as you continue to make your payments regularly and on time, your score will rise far beyond where it was when you started.
1. Making Payments on Time Raises Your Credit Score
Your payment history is one of the most significant factors affecting your credit score, accounting for a substantial 35% of your overall score. Lenders want to see that you can reliably repay your loans on time, as this demonstrates financial responsibility. Therefore, it’s crucial to prioritize making timely payments once you purchase your car. As you consistently make on-time payments, you’ll begin to see a positive impact on your credit score, improving your creditworthiness over time.
2. You’ll Extend the Length of Your Credit History
The length of your credit history makes up 15% of your credit score, making it another significant factor when it comes to raising your score. As we mentioned, when you first purchase your car, this portion of your credit score will go down. Lenders want to see that you can not only stay on time with your payments, but they also want to see that you can keep an account open and in good standing for a long period of time. This benefit does take a bit of time to kick in, but if you can continue to make your payments on time for months or years on end, you’ll extend the length of your credit history and continue to raise your score for years to come.
3. You’ll Add a New Credit to Your Report
Lenders will also examine the types of credit on your credit score, which makes up 10% of your overall report. In this case, lenders want to see that you can be responsible with several different kinds of credit, including credit cards, installment loans, and the like. Installment loans, which is the category that car payments fall into, are good measurements of whether or not you are able to manage your debt and repay it properly. Again, as you continue to pay on your car regularly, this portion of your credit report will steadily improve.
It’s important to note that while these factors can enhance your credit score, they require time and consistent, on-time payments. Initially, you might experience a slight dip in your score due to a hard inquiry from the loan application. However, this effect is typically short-lived, and the long-term benefits of responsible car loan management can significantly outweigh the initial impact.
Purchasing a car and managing the loan responsibly can be a strategic move to improve your credit score. By focusing on timely payments, maintaining the loan over time, and diversifying your credit mix, you can enhance your creditworthiness and open doors to better financial opportunities in the future.
More Tips to Improve Your Credit Score
As you’re using your car payments to improve your credit score, there are other steps you can take to keep that number climbing. First, keep your credit cards open and make sure that you are making those payments on time as well. We’ve already mentioned that car loans are considered installment loans, but credit cards are what’s known as “revolving credit.” Having healthy revolving credit lets lenders know that you can effectively manage your cash flow, and being responsible with both your revolving credit and your installment loans is the key to raising your credit score.
If you do think that you’re going to miss a payment, reach out to your lender as early as possible. Making your payments late, or skipping them altogether, can result in additional interest on your balances, skyrocketing penalty fees, and a huge dip in your credit score. Often, as long as you reach out early, lenders can help you come up with a payment plan or offer alternate solutions so you don’t fall behind.
Secure Convenient Auto Loans with FA Financing
No matter your current credit score or financial situation, FA Financing can help you get the auto loans you need to purchase a car and start rebuilding your credit score. We have more than 20 years of experience in subprime auto lending in San Diego and we’re happy to support first-time buyers in the area. We can work alongside you to highlight the strengths of your credit application and make it more appealing to lenders, helping you gain the best chance of approval.At FA Financing, we know that you’re more than your credit score. We offer an entire portfolio to potential lenders, not just your credit report, to give you a shot not only at approval but also better terms for your loan. We are dedicated to setting you up for success and helping you get started on your path to a better financial future. For more information about getting help with your next auto loan, contact FA Financing today!
Editor’s Note: This post was originally published in January 2022 and has been updated for comprehensiveness.
