How an Auto Loan Affects Your Credit Score

Are you being super careful with your credit score? You read all the latest articles on how to find a few more points by paying ahead on the mortgage and eliminating extra credit cards. But now that you need a new car, you are almost paranoid that applying for a car loan will end up hurting your score. Don’t panic! Before you decide driving that old clunker around Toronto, CA for another year is the best choice, check out some serious facts about how an auto loan really works with your credit score.

Opening a New Loan Loses Points

It is true that each time you open a credit card or apply for any kind of loan, your credit score will lose a few points. However, if this is the first time you are applying for any kind of loan this year, those lost points are just a drop in the bucket. Your score really suffers when you take out a line of credit for the furniture, the house renovation, and a new car in a short period.

Paying On Time Bumps Up Your Score in Six Months

Once you have the car loan in place, it is your good financial habits that boost your score beyond where you started. Your score will actually be higher than when you applied after you make six on-time payments for the car. Meanwhile, you have been enjoying a vehicle that starts every morning and the heat actually works. Your credit score is truly a reflection of your overall financial health, not the state of your bank account on any particular day.

Shopping Around Saves You Money without Seriously Impacting Your Credit

You do know that applying for a loan will take 7 to 10 points off your score. So, what if you are looking for a new car loan and applied to a bunch of different banks this month to get the best deal? Good for you! FICO will only apply one strike against your score when you open several applications for the same type of loan in a single month when you end up using just one of the loans. It is when you keep shopping for two or three months while applying for loans along the way that you can negatively impact your score.

In the End, It’s a Win-Win

Ultimately, when you save up for a down payment, work a steady job, pay your bills, and apply for a car loan, it is a clear indicator to the credit companies that you are in good financial shape. Even if your score is not perfect, you can still qualify for a new car loan, but you may have a significantly higher APR or extended payment terms. When you pay off that less-than-perfect loan, you will have improved your credit score while enjoying your personal car. So, go ahead! Shop for a new car and apply for that loan with confidence. You got this.