Does a Car Loan Affect My Credit Score?

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Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - February 20, 2020

Your credit score is a sensitive little bugger. It can be affected by many different things, and, of course, auto loans are a big one. There are a few things that happen once you start the car buying process, so let’s explore what changes your credit score can go through step-by-step.

The First Hard Inquiry and Rate Shopping

When you first start car shopping and give your information to a lender, or fill out an application for a loan, a hard inquiry (or hard pull) hits your credit. It isn’t always a heavy hit, and not all hard inquiries are the same, but you can generally expect a five- to eight-point drop in your credit score.

Good news, though, because if you continue car shopping and apply with different lenders or dealerships, your credit score is only affected as if one hard inquiry was made as long as you stay within a 14- to 45-day time frame.

Having multiple inquiries (of the same type) in a short time is often referred to as rate shopping. Essentially, this means you can go to multiple dealers within two weeks, and only have one hard inquiry reflected on your credit score.

As a result, you shouldn’t be afraid to shop, double-check your credit score, ask questions, and search for the best deal available.

Why Did My Credit Score Go Down?

After you get approved for the loan and get the keys to your car, your credit score drops … again. Why? It’s because your credit score is determined by five different factors:

  • 35% is payment history: whether or not payments were made on time.
  • 30% is amounts owed: how much you owe across all credit types and your credit utilization ratio.
  • 15% is length of credit history: factors in the oldest account on your credit reports, as well as the average age of all accounts.
  • 10% is credit mix: how many different types of credit accounts you have.
  • 10% is new credit: the number of credit inquiries and new accounts.

Because you just started a new installment loan, you have new credit, which also lowers your credit score slightly. Making your payments on time can bring your score back up quickly. Be sure to keep any other amounts you owe in check, such as credit cards.

How an Auto Loan Improves Credit Over Time

Since 35% of your credit score is payment history, be diligent about keeping up on payments. Automatic payments can help you never miss a payment, provided you watch your balance in the account the auto-pay draws from.

The auto loan you just got is an installment loan, and 10% of your credit score is credit mix, or variety. Having other types of credit, such as revolving credit from credit cards, can bump your credit score up.

Over the course of a few years, the length of your credit history increases, which makes up 15% of your credit score. Having active accounts in good standing on your credit reports helps with this piece of the pie.

Driving to Better Credit

In the beginning, a car loan can decrease your credit score, but only temporarily. The benefits of having an auto loan on your credit reports far outweighs the drawbacks in the long run.

Getting a car loan isn’t always easy when you have less than perfect credit. Here at CarsDirect, we make finding a dealer simple and easy for those with bad credit or unique credit situations. Take a minute to fill out our free auto loan request form, and you could be driving your way to better credit.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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