Does Car Finance Affect Credit Score?Published Tuesday, May 17, 2022
Your credit score plays a significant role in your financial opportunities. As a result, understanding which activities can impact your credit score is essential in navigating your finances strategically.
Taking out a car loan has the potential to positively or negatively impact your credit score. Additionally, your existing credit score can affect your rates for a car loan.
Read on to learn the answer to “Does car finance affect credit scores?” and everything you need to know about the relationship between car loans and credit scores. Then call our team at Westside Auto Wholesale to learn more about our auto financing options.
What Is a Credit Score?
A credit score or credit rating is a figure that indicates your financial responsibility. This score can range from 0 to 1200. The higher your score, the more responsible you have made with financial products in the past.
Lenders review your credit score to determine your reliability as a potential borrower. If you have a high credit score, lenders can use this information to predict that you will act responsibly with their loans. Conversely, lenders may hesitate to lend to you if you have a low score, leading to higher interest rates.
Lenders can also view your credit report, which details the financial activity that makes up your credit score. Your report may contain information about your:
- Credit products
- Credit applications
- Repayment history
- Credit report requests
- Bankruptcy and debt agreements
- Defaults on bills and loans
The more negative items you have on your credit report, the lower your score. However, your responsible financial behaviors can improve your score. Each time you make an on-time payment for a bill or loan, your credit score may increase slightly.
How Does a Car Loan Affect Your Credit Score?
Your credit score is a reflection of your financial activity. As a result, taking out a car loan can impact your credit score.
During your loan term, your lender will require you to make monthly payments for a previously agreed amount. If you fail to make these payments, your lender will report this activity to the credit bureaus, causing your credit score to decrease.
In contrast, when you make on-time payments and act responsibly with your car loan, your lender will also report this positive activity to the credit bureaus. In turn, your credit score may improve over time.
As a result, your activity with your car loan has the potential to improve or hurt your credit score. Acting responsibly when you take out a car loan is essential to maintaining access to future financial opportunities.
How Does Your Credit Score Affect Your Car Loan?
If you’re considering applying for a car loan or another form of car financing, you should consider how your credit score may impact your options.
First, your credit score can affect your eligibility for car financing. Many auto lenders require borrowers to have a credit score of at least 622 to qualify for a loan, placing your score in the “Good” range or higher. If your score is in the “Average” range of 510 to 621, you may need to meet additional requirements to gain loan approval.
Next, your credit score will impact your interest rates on a car loan. Generally, the lower your credit score, the higher your interest rates. Lenders will charge higher interest to create a safety net in case you fail to make on-time payments.
If your score is in the “Excellent” range of 833 to 1200, you can expect to receive the lender’s best interest rates. However, as you move down the credit score benchmarks, your interest rate will increase, making your loan more expensive overall.
Can Applying For a Loan Affect Your Credit Score?
When you submit a loan application, the lender will perform a hard credit check that may cause your credit score to decrease by a few points.
These hard credit checks are a necessary step in securing loans. However, you can prevent them from impacting your credit score too severely by limiting the number of loan applications you submit.
If you submit several loan applications within a short period, your score may drop by ten or more points. Lenders will also be able to review this activity in your credit report. Multiple lending applications may indicate that you are in financial distress, making potential lenders hesitant to work with you.
To avoid submitting multiple lending applications, we recommend reading lending criteria thoroughly to determine your eligibility. If you discover that you do not meet the eligibility requirements, you can move on to another option rather than wasting time and credit points with an application.
How To Improve Your Credit Score
Taking steps to improve your credit score can help you secure a more favorable interest rate on an auto loan. Here are a few reliable ways to raise your score:
- Make payments on time: If you currently have any loan payments, credit card payments, or bills with due dates, make sure to pay these bills on time. Just one late payment can lower your credit score by 22%. However, on-time payments can improve your score over time.
- Open new credit accounts: If you do not have many credit accounts, taking out personal loans or applying for a new credit card can help increase your score. Of course, you’ll want to act responsibly with these new accounts to avoid worsening your score.
- Dispute incorrect credit items: If your credit score has decreased significantly over the past few months, you may want to review your credit history. Your credit report may contain incorrect items that you can dispute with the credit bureaus to remove.
- Avoid making it worse: Avoiding activities that could hurt your credit score is essential to improving it quickly. Late payments can lower your score significantly, and you’ll need to make several on-time payments to recover from this dip.
At Westside Auto Wholesale, we offer multiple financing sources and same-day loan approval, allowing you to streamline your auto loan process. Check out our car finance page for more information about financing a vehicle through Westside Auto Wholesale today.