How much will a car loan lower my credit score? | Loan Boom (2024)

FAQs

How much will a car loan lower my credit score? | Loan Boom? ›

Shopping around for a car loan can potentially impact your credit score. That's because every time you apply for a loan and have a hard credit check, your score can drop by roughly 1 to 5 points. Fortunately, there are ways to avoid major credit damage.

Although making on-time monthly payments will eventually lead to a higher credit score, most car buyers will first experience a temporary reduction in their credit score. In short, buying a car can be a good way to build your credit score over the life of the loan, but it's more of a long-term credit building strategy.

If you qualify for and accept a loan offer, you'll typically see another small score dip. Hard inquiries will reduce your credit score anywhere from 5-10 points for about a year.

An auto loan can have a big impact on your credit score, which in turn has a big impact on whether you will get approved for a home loan and what rates you will get.

Hard credit checks temporarily lower your credit score by as much as 10 points. But if you have excellent credit, applying for a loan will most likely make your score drop by five points or less.

If your auto loan doesn't show up on your credit report after 30 to 60 days, reach out to your lender. Ask them if it's their policy to report loan activity to the credit bureaus and, if so, whether they can follow up to make sure your loan information has been reported accurately.

For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO^® Score^☉ in the U.S. reached 715.

The bottom line. Paying off a car loan early can save you money — provided the lender doesn't assess too large a prepayment penalty and you don't have other high-interest debt. Even a few extra payments can go a long way to reducing your costs.

Paid, closed accounts remain on the credit report for 10 years from the paid date if they have no negative payment history.

The drop could have occurred for multiple reasons as credit scores are calculated using a variety of factors. People often see their credit scores drop after paying off debt due to a change in the types of credit they have, an increase in their overall utilization or a decrease in the average age of their accounts.

Is it harder to get a car loan or mortgage? ›

“It's true that it's easier to qualify for an auto loan than it is for a mortgage,” Lonergan says. “But credit issues will still hurt in some way, no matter what type of loan you are applying for.”

When you apply for a car loan, a home loan or even a phone contract or utility account, the financier or utility provider will check your credit file and generally leave a credit enquiry on your file. A large number of credit enquiries can affect your credit score along with unpaid accounts and defaulted payments.

However, many people find that getting approved for a car loan is a little easier than the approval process for a mortgage. This is because mortgages tend to require a much deeper investigation into your finances than car loans do.

Requirements to receive a personal loan

This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.

You Have Late or Missing Payments

Your payment history is the most important factor in your FICO^® Score^☉ , the credit scoring model used by 90% of top lenders. It accounts for 35% of your score, and even one late or missed payment can have a negative impact. So, it's key to make sure you make all your payments on time.

A new car loan could add another type of loan to your overall loans, which may benefit your credit score by improving your credit mix. In the long term, paying your car payments on time can boost your credit score. As you pay down your loan, your credit score can improve as your total amount of debt declines.

For most people, it can take anywhere from 30 to 90 days for a new or refinanced loan to appear.

While paying off your debts often helps improve your credit scores, this isn't always the case. It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. However, that doesn't mean you should ignore what you owe.

Key Takeaways: While you can find financing with any credit score, a good credit score for a car loan is usually between 670 and 850. Your credit score is affected by many factors including payment history, amounts owed/utilization, length of credit history, credit mix, and new credit.