How Your Car Loan Balance Affects Your Credit Score

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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 - July 6, 2020

Your credit score serves as a quick snippet of your credit reports, but it doesn’t tell the whole story. We’re here to go over the main aspects of one of the most important categories of your credit score: amounts owed.

What Makes Up Your Credit Score

Your credit score is a three-digit number that ranges between 300 and 850. If you’re like most borrowers, you likely have a rough estimate of where you sit. If you don’t, you can check your credit score here.

Wherever you sit on the credit score range, everyone’s FICO credit score is calculated by the same five categories:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • Credit mix: 10%
  • New credit: 10%

There are a few credit scoring models out there, but FICO is usually the one that’s used by auto lenders. This means lenders are likely to use your FICO score to gauge your ability to take on a car loan. But there's more than just a score to your credit, and lenders tend to look at the bigger picture.

When you finance a vehicle, the amount you borrow is debt, and the amount of debt you have plays a major role in calculating your credit score. The FICO scoring model puts a 30% weight on amounts owed, which has to do with how much debt you have and your credit utilization.

Auto Loans and Amounts Owed

If you carry a lot of debt, you may be viewed as a high-risk borrower. Your total debt includes the amount you currently owe on installment loans and credit cards – also known as your total amounts owed.

Auto loans are installment loans. This type of credit is paid off in a set period of time, with a set payment each month (most car loans are monthly). While having lots of debt can be a red flag to lenders, having well-managed installment loans can improve your score, and it tells lenders you’re a responsible borrower. Making all your auto loan payments each month tells the credit scoring models that you are able and willing to repay the loan, which improves your credit (even if the balance is high).

Every month, you’re lowering the amount you owe by making payments. This also impacts your payment history aspect of your FICO credit score, which carries the most weight (35%).

If you start missing payments, it can harshly negatively affect your credit score. Missed and late payments can remain on your credit reports for up to seven years, so be sure to make it a priority to make all your installment loan payments on time each month.

Other Credit That Impacts Amounts Owed

While car loans are almost always installment loans, another type of credit that most borrowers utilize is revolving credit, or credit cards. A credit card has a maximum borrowing limit, and when you have an outstanding balance, you have a minimum amount that you must repay each month until that balance is zero.

If you have a lot of accounts with high balances or lots of maxed out revolving credit lines, it usually indicates that you’re a high-risk borrower, since it seems like you’re relying on a lot of credit. This can also indicate that you may struggle to pay it off in the future.

One of the best things you can do to help improve your amount owed category is to continue to make timely payments on all your debts so you reduce these balances and the total amount you owe on your credit accounts.

A large aspect of your amounts owed is your credit utilization ratio, which has to do with your credit card balances. It compares how much you’re allowed to borrow against how much you owe across all of your credit cards. As a rule of thumb, credit experts say that you should keep your credit card balances at 30% of their limits or below (and lower is better).

Anything higher than that is when it really starts to negatively affect your credit score. Keeping balances below the 30% mark also tells lenders and the credit bureaus that you’re not relying on revolving credit. By keeping your credit card balances low, you can really improve your credit score.

An Auto Loan to Improve Your Credit

Auto loans can also contribute to your credit mix, which takes into account the different types of credit you’re using. If all you have is revolving credit, or you have no credit history at all, a car loan could offer a big boost to your credit mix and improve your credit score.

Finding a lender to work with your poor credit score can be difficult, but we want to help! If your credit score isn’t the best, and you’re looking for a way to improve it, a subprime auto loan could be for you. Subprime lenders work through a dealership’s special finance department, and they work with borrowers with no credit, bad credit, or unique credit situations.

If you’re in need of a car loan and you want a lender that can work with your personal situation, start here with CarsDirect. We match borrowers to dealers at no cost with our auto loan request form. It's completely online and secure, and we’ll look for a dealership in your area right away!


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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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