You probably aren't giving much thought to the vehicle loan agreement you signed or how it could damage your credit as you drive away from the car dealer's parking lot in your brand-new ride. This is understandable. On the other hand, if you are not diligent, a few little errors might make it challenging for you to get more lines of credit.

How Car Loans Affect Credit

Two foreseeable implications obtaining a new car loan will have on your credit score:

• Your credit report will get a hard inquiry due to this, which may lower your score by a few points. Refinancing a car loan has a comparable impact on one's credit score.
• If your payments are always made on time, it will contribute to your credit history, which will be to your advantage in the long run.

If you stick to the terms of the agreement and make payments on time, any points deducted from your credit score as a result of the application process should be more than compensated for by the points added due to your track record of timely payments.

Auto Loans On Your Credit Report

Your credit record and score may be impacted due to the vehicle loan you took out. When you first look at your credit reports, you could feel like you are drowning in a sea of information. Turn to the page on the reports issued by each of the three main credit agencies — Experian, Equifax, and TransUnion — that includes your car loan account, and then look at the following two categories to get an idea of your car finance situation:

Type of accounts

In most cases, a vehicle loan will be shown on a credit record as an installment account. Mortgage and education loans are two more examples of accounts that be paid back in installments. These are payments made a certain number of times, each for the same amount. If you don't already have an installment loan, acquiring a car loan might be beneficial to your credit profile since "credit mix" is one factor determining your credit score.

Current status

Your credit record will reflect that your auto loan is "current" or "paid as agreed" if you are always prompt and never miss a payment deadline. Because of the weight given to a person's payment history in determining their score, maintaining good payment history may have a considerable positive impact on their credit score. Should you fall behind on your payments for thirty days or longer, the lender has the right to repossess your car, which can severely damage your credit.

Excellent news if you have a history of timely payment of all vehicle loan obligations, as shown by your credit reports. Consider submitting a dispute, however, if a mistake appears, such as a payment made on time being marked as late.

What To Know About Car Loan Shopping

Your automobile finance request will still be shown in another location, namely, the list of credit inquiries. When you apply for credit and have inquiries about your account, it might lower your credit score. However, if you submit many car finance applications simultaneously, you should only consider them as a single transaction.

You might have several hard inquiries shown on your credit report if you enable numerous lenders to perform credit checks on you when shopping around for the best loan rates on car loans. It's all good.

When determining your FICO score, the number of hard inquiries shown on your credit report will only be counted as one. This is the case in most cases if you search for a car loan within thirty days. The purchasing window included in the VantageScore rolls over every 14 days. Play it carefully and limit the scope of your search to avoid causing unneeded damage to your credit score.

Summary

Does taking out a loan to purchase a car damage your credit score? In a nutshell, only momentarily, if you continue to make your payments on schedule. Remember that applying for a car loan results in a hard inquiry being made on your credit, which may result in a reduction of anywhere from five to ten points on your FICO score.

Does making payments on a car help improve credit? Yes, they can, but only if your payments are always on time and you get all of them. Your ability to make on-time payments on your vehicle loan reveals to credit bureaus that you can be trusted, which may increase your credit score over time. However, paying your bills late will only work to damage your credit.