Car Buying Affects Credit Score
Car Buying Has a Good Effect on Your Credit Score
Car buying 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 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 drop for this is about 10 points depending on where you were in the first place. The application 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. 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 that 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 to make sure the 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.
- Will I Get Approved For A Car Loan?- Yes. See How To Get It Instantly
- Tips Before You Seek A Bad Credit Auto Loan
- How To Prepare For Your Car Loan Application
- How a Car Loan Will Affect Your Credit Score