Car Buying Affects Credit Score

Car Buying

General Motors automobile mural (Photo credit: Toban Black)

Car Buying Has a Good Effect on Your Credit Score

Car buying financing will initially cause a dip in your credit score followed by an improvement as time goes on if you make all your payments on time.

Why is this?  Let’s go back to the basics of car buying

  • The loan application inquiry itself may cause a slight drop in your score usually for a year.  This is true of any loan application.  FICO’s web site says ” a single inquiry has little to no effect on the average credit score.”    Several applications within a 30 day period while you shop around will be treated as one application.  The average credit scoring drop for this is about 10 points depending on where you were in the first place.  The inquiry will not affect your score until about 30 days after you file it.
  • You have now created a brand new account which lowers the average age of your credit history.
  • When you first get the loan you will be at maximum utilization of available credit for that line.  Utilization for installment loans like a car loan do not affect your score as much as utilization on revolving accounts like credit cards.  If you have a $10,000.00 loan and owe $10,000.00 you are at 100% credit utilization for that loan.
  • As time goes on and you make your payments on time FICO will see that you are a dependable payer on the car buying loan as well as other lines of credit you may have.
  • Each payment lowers the  principal and increases your available credit to amount owed ratio.
  • The date of the beginning of this automobile line of credit ages.  As the new line ages you will recoup some of the loss to your average age of accounts.
  • You have now made a favorable addition to your mix of types of credit because this is an installment loan which you are proving you can handle responsibly.
  • Check ahead to make sure the car buying loan is reported to all 3 major credit bureaus.

Free Bonus is the increase to your special FICO “Auto Enhanced” score which will help you the next time around for an auto loan. Automobile dealers frequently use an “industry option” which is a custom formula FICO provides for them focusing on how you have handled previous auto loans. Check my previous post on this topic.

The “mix of credit” component of your credit score is important.  This is frequently overlooked but it can make a good credit score become a very good credit score.   If some of these concepts seem unfamiliar, order and read the book and find out how truly fascinating this whole topic of credit repair and enhancement can truly be.

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After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

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