How Does Buying a Car Affect Your Credit?

New driver in town!

The new-car smell. The wind in your hair. The envious glances from passersby. Buying a car delivers plenty of thrills, but can it also help improve your credit? Auto loans can negatively or positively affect your credit depending on whether you make your payments on time and repay the loan in full as agreed.

Your payment history plays a big role in your credit score, accounting for 35% of your FICO® Score , the credit model used by most lenders. On-time payments reflect positively on your creditworthiness. Getting a car loan might also diversify your credit mix (the types of credit you have), which can improve your credit score.

Whenever you apply for new credit, such as a car loan, lenders make a hard inquiry into your credit report. Too many hard inquiries in a short time can hurt your credit score. However, don't let concern about hard inquiries keep you from shopping around for the best auto loan. As long as all of your auto loan inquiries take place within a certain time frame—aim to submit all your applications within a two-week period—credit scoring models count them as one inquiry when determining your credit score.

Ways Buying a Car Can Impact Your Credit

Whether buying a car negatively or positively impacts your credit will depend on how reliably you make your loan payments. When you first get an auto loan, you may see a slight dip in your credit scores because you're taking on a hefty new debt. However, as you begin making on-time payments on the loan, your credit score should bounce back.

Buying a car can help your credit if:

  • You make all of your payments on time. Because payment history is the biggest factor in your credit score, making payments on time and in full should improve your credit score over time.
  • It improves your credit mix. Lenders like to see a mix of revolving credit (such as credit cards) and installment credit (such as auto loans) in your credit history. Successfully managing a wide variety of credit accounts helps prove that you're creditworthy. If you currently have only revolving credit accounts, credit cards for instance, adding installment credit in the form of an auto loan could help boost your credit score.

However, buying a car could end up hurting your credit if:

  • You miss one or more payments. As soon as you miss a payment due date, your car loan is considered delinquent. You'll usually have a short grace period during which you can make up the payment. If a full billing cycle passes and you still haven't paid, the lender will report your delinquency to the major credit bureaus, which is likely to hurt your credit scores.
  • You default on the loan. Some auto lenders will declare your loan in default 30 days after your payment is due; others will wait 90 days. Once your loan is in default, your account will be turned over to debt collectors, who will contact you to seek payment. If you still don't pay, your car could be repossessed. Late payments, default, having your account go to collections and repossession each leave a separate, negative mark on your credit report, and each stays on your credit history for up to seven years.
  • You can't afford the loan. If you're struggling to make your car payments, you might fall behind on other bills, leading to late payments that could negatively affect your credit score. Before you buy a car, review your budget to be sure you can manage the monthly payments and other costs of car ownership.

How to Get Your Credit Ready to Buy a Car

Whether you're in the market for a new or used car, chances are you'll need a car loan. To get the best possible loan terms, make sure your credit is in good shape before heading to the dealership to purchase a car.

Start by getting a copy of your credit report and reviewing closely. Next, check your credit score to see where you stand. If you have a good credit score (many lenders consider this to be a FICO® Score of 700 or higher), you're more likely to qualify for desirable loan terms. If your score is in the exceptional range (800 or higher), you might even qualify for sweet deals such as 0% APR financing.

Lower credit scores generally translate into higher interest rates on your auto loan; over the course of the loan, this can really add up. If your credit isn't where it should be, improving your credit score before you go car shopping could save you thousands of dollars in interest costs.

Additional Ways to Build a Positive Credit History

Getting an auto loan and making your payments on time is one of the best ways to build up a positive credit history, but it's not ideal to start financing a car when you have low credit scores. If you have poor or fair credit, you can help boost your score by bringing any late accounts current, making all your payments on time and paying down debt.

If you're new to credit, you can build a credit history by applying for credit cards, using them for small purchases each month, and paying your bill on time and in full. If you can't qualify for a regular credit card, consider applying for a secured credit card, or see if a family member with good credit will add you to their account as an authorized user. Another option to consider is a credit-builder loan.

If you're a renter, you can ask your landlord to report your rent payments to credit bureaus. Most landlords don't normally do this, but if yours is willing to start, adding the information to your credit report can help build your credit.

Keep an Eye on Your Credit Score

Once you've purchased your car, be diligent about making your loan payments on time. Put your payment due date on your calendar or set up automatic payments (just make sure you have enough money in your bank account to cover them).

To see how your auto loan affects your credit score, consider signing up for free credit monitoring from Experian. You'll get monthly credit reports, notifications of activity on your credit report and alerts whenever your credit score changes. It's a great way to stay in the driver's seat when it comes to your credit.