Buying a new car can be an exciting experience. The auto loan you took to make it happen will affect your credit, and it could have either a negative or positive impact depending on whether you make your payments as agreed. Let’s take a look at how an auto loan affects your credit.
Applying for a Loan
When you make the decision to buy a car and apply for financing, the first thing that happens is a hard inquiry appears on your credit report. This lets other potential creditors know that you’ve recently applied for a new loan. Your credit score may drop a few points, but it won’t be affected for long. If you have multiple pulls for the same purpose in a week or two, they’re rolled into one.
Your Payment History
One of the biggest factors that go into calculating your credit score is your payment history. If you pay your auto loan payments on time every month without fail, it will have a positive impact on your credit. If you miss one or more payments, your auto loan can have a negative impact on your credit. Depending on the terms of your loan, you may have a short grace period, but if your payment is more than 30 days late, a delinquency appears on your credit report. This can impact your credit score for as long as seven years.
Your Credit Mix
Your credit mix has a small impact on your credit score. Lenders like to see that you have experience managing different types of credit. If up until now you’ve only had credit cards or a student loan, being approved for a car loan may improve your credit mix.
Age of Accounts
The age of your accounts is another factor that may have a small impact on your overall credit. A new loan may make your score drop slightly because the average age of all your accounts is lower. If you don’t have many other accounts, this may be more noticeable than if you have had experience managing borrowed money over the course of several years.
The Total Amount You Owe
Before taking on an auto loan, consider how much debt you already have and whether you can afford to make the payments. If you’re able to make a large down payment, it can help reduce the amount of your monthly payments.
Pay Attention to Your Credit
Paying your car loan as agreed will help your credit score as long as your creditor reports your payment history correctly. If a creditor reports a wrong balance or a wrong payment history, it can end up hurting your credit even though you did what you agreed to do. Keep an eye on your credit, and make sure nothing is being reported that is inaccurate.
If you find any errors on your credit report, Dovly can help to get them corrected for you. Dovly is an automated credit engine that can help you track, manage and fix your credit. Our goal is to help you get ahead with free credit services. Get in touch with Dovly today.