It is important to buy a car, but this can have a negative impact on your score. The decision to buy a new car with a loan depends on several factors. These include how much money you have available and how you manage your credit.
A car loan will help you improve your FICO score and build your credit history. In addition, taking out an auto loan can allow you to refinance your mortgage and other loans at a lower interest rate in the future.
How Does an Auto Loan Affect Your Credit?
Your credit score depends on many factors. These include your payment history, and the length of time you have had credit. Credit scores can be improved by a good credit history.
Your credit score takes into account your credit usage ratio. This is how much revolving debt, or revolving loan payments, you have in comparison to your total available credit. Too much revolving credit can affect your credit score. It's best to keep balances low, and pay off your debts as quickly as you can.
Another factor your credit score considers is your credit mix, which reflects the different types of credit you have. A healthy balance of installment debts like a car loan or mortgage and revolving loans like credit cards is the goal.
You can improve the mix of your credit by applying for new revolving debt, like a card. However, it is not necessary to apply for everything at once. You could be sending the wrong message to your lenders by doing so.
The length of your credit history and the age of your accounts is also important to your credit score. Financing a new car can cause your average account age to decrease slightly, which can have an adverse effect on your length-related scoring factors.
This can also have a negative impact on your variable amounts owed, which accounts for 30% of your score. Addition of a new installment credit to your report will increase the amount you owe.
People often pay off their auto loans early. Paying off an auto loan early can affect your credit score negatively.
Keeping your auto loan open with timely payments will have a positive impact on your length-related scoring factors, which accounts for 15% of your credit score. When you close an auto loan, your average account age will drop because it's no longer considered an active account.
Getting a car loan could have a positive influence on your score, as it can help you establish a credit history that is solid and reliable. Keep in mind, however, that a new auto-loan can have a long time to improve your credit score.