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Does Financing a Car Hurt My Credit Score?

December 23, 2022

Are you dreaming of driving a sleek new car but worried about what it might do to your credit score? We understand, and so do millions of other Americans. In fact, 77% of the US population worries about their financial situation, including their credit score.

We know that the thought of financing a vehicle can feel overwhelming, but we’re here to tell you not to worry. With the right information and financial tips, you can finance that car without damaging your credit in the long run. 

Let's take an in-depth look at exactly how financing a car affects your credit scores and explore ways to get the best loan for yourself and your wallet.

Do Car Dealerships Use Equifax or TransUnion?

Both! When car dealerships are looking to approve a credit score, they need to have access to reliable credit information. That's why most dealerships use credit scoring models such as VantageScore or FICO. 

No matter which credit score is used for an auto loan, it is often sourced from one of the three credit bureaus: 

  • Equifax
  • TransUnion
  • Experian

While TransUnion credit scores are still available to dealers, more often than not they rely on credit scores from either Equifax or Experian. 

What’s more important to know, though, is what a FICO Auto score is. Most car dealerships will take a look at this special score when determining your creditworthiness. Your FICO Auto score uses data from your credit history and other factors to assess your propensity for successful repayment of an auto loan. 

The main difference here is that FICO Auto scores range from 300 to 850, with higher scores associated with better repayment terms and lower interest rates. All in all, knowing your FICO Auto score can be useful when considering taking out an auto loan as it will allow you to see how lenders perceive you as a potential borrower.

How Does Buying a Car Affect Your Credit Score?

Will a car loan help your credit? How much will a car loan drop your credit score? These are valid questions most people have when financing a car for the first time.

The answer to whether this will help or hurt your score depends on the specific details of your loan. For example, taking out a car loan with a long repayment period might have a negative effect and lower your score due to the amount of debt you are accruing.

However, if you agree to pay within the agreed timeframe and make on-time payments each month, it can help you in improving your credit rating. 

To ensure that a car loan has positive rather than negative effects on your credit, always review and understand all of the terms before signing any documents associated with car financing. And, check out these tips.

How Does Financing a Car Help Your Credit?

Financing a car can improve your credit score in two key ways:

  • Make your loan payments on time. Paying as agreed demonstrates an ability to handle debt responsibly and that usually translates into a higher score. 
  • Diversifies your credit mix. Different types of loans and other accounts such as credit cards provide information to creditors and give them more reasons to feel confident in loaning to you.

However, the most important thing to remember is that responsible borrowing is the key to achieving a higher credit score.

How Does Financing a Car Hurt Your Credit?

In some cases, financing a car can hurt your credit score. This is typically only temporary, but the potential for a decline in your credit rating is impacted by the following factors:

  • Hard credit check. When you finance a car, the lender may request to do a hard credit check, which will cause your score to drop temporarily.
  • You miss payments. If you miss payments or are late with payments for more than 30 days, this could create further issues with your credit score. Not only that, but other lenders may be hesitant to offer to finance if they see too many missed payments on your credit report (remember, these stay on your credit report for up to seven years!).
  • You default on the loan. A defaulted auto loan leads to collections and late payments being reported to the credit bureaus and these negative items stay in your credit report for up to seven years. Defaulting on an auto loan will also lower your overall credit utilization ratio, which is another factor that affects credit scoring. 

How Long Until Your Credit Score Improves After Buying a Car?

We know what you’re probably thinking now. “How fast will a car loan raise my credit score?” Ultimately, it’s hard to say. With products such as credit builder loans, for example, your credit score can increase by as much as 60 points in about two weeks. 

However, with auto loans, it takes slightly more time. All in all, buying a car indeed has the potential to improve your credit score, but that success depends on a variety of factors such as length of credit history, credit utilization ratio, and payment history. 

Paying off your credit regularly and fully is an essential factor in improving creditworthiness. Additionally, the information about your car purchase is typically reported right away, but you may not see a sizable score improvement until six months after purchasing the car. 

If the credit report doesn't reflect timely payments in six months, it may be necessary to contact the credit bureaus directly and look into additional credit-building options.

What Is a Good Credit Score to Buy a Car?

Before you buy a car, it's important to understand what is considered a good credit score to make the purchase. Generally, anything higher than 670 is considered good and this indicates that lenders are likely to approve you for an auto loan when you have such a score. 

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If your credit score is lower than that, lenders are more likely to require higher payments and interest rates if they do accept your loan. To get the most favorable financing terms for a car purchase, aim for a good or excellent credit score of 700 or above. That way, it’ll be easier to secure good rates on your loan and save yourself some money in the long run.

How to Improve Your Credit Score for Buying a New Car

Don’t have a great credit score? No worries! There are several things you can do to improve your credit score before buying a new car. Implement these tips to boost your credit score quickly and easily.

  • Check your credit score and report. By regularly checking in with your credit report, you'll gain a better understanding of what's hurting and helping your overall score. Plus, if there are inaccuracies in your report, you can take steps to dispute them and improve your standing with creditors quickly.
  • Pay your bills on time. Your payment history, which includes your record of making payments on time, is usually the most important factor when it comes to maintaining a good credit score. Every payment you make that's submitted in full and on-time increases your credibility as a borrower and helps boost your credit score over time.
  • Reduce your debt-to-income ratio. By reducing the amount you owe each month relative to what you earn, you reduce your DTI and make yourself appear more financially stable. If possible, aim to reduce your debt-to-income ratio below 36%, as that's usually the desired threshold for lenders when reviewing loan applications. 
  • Lower your credit utilization rate. Your credit utilization ratio is the percentage of available credit you are using, which tips off lenders whether you are utilizing credit responsibly or over-borrowing. Lowering your credit utilization helps demonstrate to lenders that you do not depend on large amounts of debt for day-to-day living expenses, making you more likely to be approved for future loans and purchases. 
  • Don’t open new accounts. Opening new accounts can hurt your credit score in a variety of ways by increasing the amount of available credit to use, bringing down the average length of your credit history, and causing more inquiries on your credit report which will all result in lower scores. 
  • Get a secured credit card. This type of credit card offers secured funds, meaning you must provide collateral to open a secured account. By using this secured card and properly managing your payments, you can demonstrate your fiscal responsibility to lenders by building a positive payment history and increasing your credit score over time. 

If you’ve implemented all of these tips and still aren’t seeing results then there is one last great option to consider…

Improve Your Credit Score With a Cheese Credit Builder Loan

If you're looking for ways to improve your credit score, apply for a Cheese credit builder loan. We offer loan amounts starting from as low as $500 with term lengths ranging from 12 to 24 months. 

You don't have to worry about missing payments either! Our handy autosave feature takes care of it in a jiffy. Once the loan is paid off, you’ll see your credit score as well as your savings have grown! Ready to boost your credit score? Apply now for a Cheese credit builder loan.

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