How Much Will a Car Loan Drop My Credit Score?
Taking on a car loan will impact your credit score, but it’s impossible to predict how much it’ll change. That’s because credit scores are based on several different factors, and auto loans can add both positive and negative information to the mix.
Most borrowers are likely to see a drop in their credit score after taking out a car loan, but they can gain back those lost points (and more) by making on-time payments and reducing their loan balance.
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Does applying for a car loan hurt your credit score?
Fortunately, there are ways to avoid major credit damage. One way is to look for lenders who offer car loan preapproval. When you get preapproved for a loan, you can see a rate quote without having the lender make a hard pull into your credit. In other words, your credit score won’t be affected.
Another way to protect your credit score is to submit all of your car loan applications within a 14-day “rate-shopping window.” When you make multiple applications within this time frame, FICO only counts them as one.
What affects my credit score?
Taking on a car loan can affect your credit score in a few different ways. Here’s what’ll change as a result of a new auto loan:
- Payment history: Your history of on-time debt payments is the biggest factor in determining your credit score (35%). If you stay current on your car loan payments — meaning you make at least the minimum payment due each billing cycle — you can build up yours.
- Credit utilization: Thirty percent of your FICO credit score is based on the amount of debt you owe. Taking on a new loan can hurt you in this area, but you can improve your credit score by paying down the car loan balance.
- Credit history length: Fifteen percent of your credit score is based on the average length of your credit — the longer you’ve had loans and credit cards, the better. When you take out a new car loan, your average length of account history is likely to drop, but you can improve in this area over the duration of your loan.
- Credit mix: A small part of your credit score (10%) looks at the different types of credit accounts and loans you have in use. If you don’t have any active loans, especially any auto loans, adding one to the mix can help your score improve.
- New credit: Opening new loans or credit cards can hurt your credit score, since new accounts represent financial uncertainty. Yes, new accounts only make up 10% of your FICO Score, but you may see a small drop when you apply for new auto loans.
Reviewing your credit reports and score before car shopping can help you get in a better position to get a car loan with lower interest rates. You can get reports for free from all three credit bureaus at AnnualCreditReport.com. Credit monitoring will also help you see what changes happen after you take out the loan.