How Much Will a Car Loan Drop My Credit Score?
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A new car loan will likely result in a small, temporary drop in your credit score stemming from lender credit inquiries, having a recently opened new credit account, and the resulting greater overall debt load. This decrease can be offset after you begin making monthly payments.
The slight decline in your credit score is unlikely to have any major ramifications unless your score is on the fringes of being average, good, or excellent and you plan on financing another major purchase in the next several months.
The following table provides an overview of how lenders typically interpret a prospective borrower’s credit score.
Credit Score Ranges
| Category | FICO Score Range |
| Excellent Score | 800 to 850 |
| Very Good Score | 740 to 800 |
| Good Score | 670 to 740 |
| Fair Score | 580 to 670 |
| Poor Score | Below 580 |
Source: FICO Score Ranges
One potentially adverse scenario would involve having a credit score within 10 points of a different categorical range. If you were already planning to apply for a home mortgage within the first few months after entering your car loan, you might need to strategize.
For example, you could postpone one of the purchases to allow for time to recover from the drop in the score by making the loan payments.
Another option is to identify ways of proactively increasing your score i.e., reviewing your credit report to correct any potential errors.
How a Car Loan Impacts Your Credit Score
Although your credit score may slightly decline after initially securing a car loan, you should experience very positive long-term results. As you begin to make timely monthly car loan payments, your credit report will contain an active credit account that is in good standing.
Among the various factors used to calculate your credit score, payment history has the largest influence. It is critical to avoid late payments, missed payments, or collection-related activity throughout the term of your new car loan, which will have a very detrimental impact.
Consumers who are seeking a car loan should consider their overall financial picture. For instance, acquiring a car loan with payments you will struggle to make or proceeding without any emergency savings can position you for failure when unforeseen financial challenges arise.
Hard Inquiries Will Temporarily Bring the Score Down
When borrowers formally apply for auto loans or any other new credit accounts, the bank, credit union, or another lender will review your credit history to assess your eligibility. This hard credit “pull” has a slightly adverse impact on your credit score — of roughly 3 to 5 points.
According to Equifax, credit inquiries appear on your credit report and remain for 24 months after a credit check. However, FICO’s credit scoring model currently will only use inquiries from the prior 12 months in calculating your credit score.
Further good news is that having multiple credit report inquiries in a short span of several weeks from lenders for auto loans or mortgage loans are usually recognized as being the result of “rate shopping” and are consolidated into a single entry.
A New Loan May Lower the Average Age of All Your Accounts
Auto loans or other new credit accounts may adversely impact your credit score by reducing the length of your overall credit history. Specifically, the average age across all accounts and the time since you last opened a new account are both related factors.
Each new credit account opened lowers your overall average age. FICO score calculations are influenced by a consumer’s length of credit history by roughly 15%. VantageScore, the other popular credit-scoring model, classifies these factors as “less influential”.
Another related concern is that the average age calculation is generally based on any open or active accounts. For example, consumers with older, open credit card accounts with a zero balance often notice a slight decline in their score after formally closing an account.
With auto loans and other installment credit accounts, paying off the loan converts that credit report account entry to inactive or closed; therefore, you might think twice about paying off a car loan early.
How Auto Loans Influence Your Credit Mix
Another factor that influences your credit score is your “credit mix” or the diversity among all current categories of accounts. Lenders generally prefer that consumers demonstrate the ability to responsibly manage different types of accounts.
Among the possible mix include installment loans such as car loans, student loans, mortgages, and revolving credit accounts such as credit cards. Credit mix has a relatively modest influence on FICO scores of approximately 10% and a similar effect on a VantageScore.
Consumers without a current car loan may benefit from establishing one, while the opposite effect may occur when paying off an existing car loan if you have no remaining credit utilization within this category of credit.
Improving Payment History
The single largest factor that influences your credit is your payment history, which can account for as much as 35% of your FICO score. Your credit history allows potential lenders to assess how likely you are to repay a debt based on your past record.
Your payment history will impact your ongoing costs of credit that can really become significant. When lenders who review your credit report consider you to be a risk, they are likely to only offer very high-interest rate financing.
Those with bad credit generally pay inflated interest rates on auto loans that result in expending thousands more over longer-term loans such as those ranging from 48 to 60 months that are common today.
Don’t Default or Miss a Payment
Obtaining a new or refinancing an existing car loan creates an opportunity to both potentially improve or worsen your credit. Failing to make timely payments has significant negative ramifications.
Keep in mind your vehicle may be subject to repossession by the lender when you have late or missed payments.
One common problem among those with a poor credit history is that they might only qualify for car loans with extremely high-interest rates and fees. In many cases, these consumers may feel that these unfavorable options represent the only means of raising their credit score.
A credit builder loan from Credit Strong is a viable alternative for boosting your credit score. Here, you enter an installment loan and make affordable, fixed monthly payments that are reported to the three major credit bureaus.
FAQs
Does Buying a Car in Full Help Your Credit?
In short, no. Paying cash for a car upfront rather than accruing debt and making car payments to an auto lender may be a good option for saving on interest rate charges. But keep in mind that the purchase will have no impact on your credit history or credit score.
Borrowers that are seeking to establish a credit history or those with lower credit scores that want to work toward building credit may consider obtaining an auto loan.
However, those considered “sub prime borrowers” might only qualify for auto loan financing at very exorbitant rates.
Individuals with cash on hand should also consider if they have other debts such as personal loans, student loans, or credit card balances that have higher interest rates. In this case, you might proceed with a lower interest rate auto loan and allocate those funds toward another debt.
Does Your Credit Score Go Down When You Get Car Financing?
Many borrowers that enter a car loan agreement experience a slight decline i.e., 10 to 15 points in their credit score. Fortunately, this drop is temporary and will inherently be recovered after making a few months of timely loan payments.
Part of the drop in your credit score stems from the process of obtaining lender financing. After receiving your credit application, a prospective lender conducts a credit check “hard inquiry” that automatically generates an entry on your credit report that has a slightly negative impact.
Getting a car loan can also create a slight credit score reduction because it increases your overall debt load (total) and the new credit account lowers your overall average age of all credit accounts, which both can reduce your score by a few points.
What is a Good Credit Score to Buy a Car?
Consumers with a 700-credit score or higher typically will qualify for the most attractive rates. In the market today, the average prices currently exceed $40,000 for new vehicles and $25,000 for used vehicles, which poses major affordability concerns for buyers with poor credit.
Experian, a major credit bureau, says lenders who provide auto loan financing have general FICO score ranges or categories for what they consider to be poor to excellent credit and the average corresponding rates are as follows:
- Super Prime (781-850): 2.34%
- Prime (661-780): 3.48%
- Nonprime (601-660): 6.61%
- Subprime (501-600): 11.03%
- Deep Subprime (300-500): 14.59%+
Can I lease a car with bad credit? There is no standardized minimum credit score to qualify for a lease; however, applicants with a credit score below 620 are unlikely to qualify and will have very limited leasing options compared to a traditional auto loan.
Consumers that are financing a vehicle purchase should expect a small, temporary drop in their credit score after finalizing the loan. Fortunately, maintaining responsible financial habits by making timely payments on all debt will result in sustained success with credit.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
