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The Credit Building Journey
You may be in a spot where you are looking to save money and build credit, but you are not sure the best way to go about it. Building credit can be frustrating and that is why we are here to help.
So the question is, how fast will a car loan raise your credit?
Well, that depends on what the rest of your credit report looks like.
Good credit history can mean lower impacts on your credit score than a bad one.
That may seem pretty obvious, so let’s dive a little deeper.
How Does a Car Loan Affect My Credit?
When you get a car loan affects your credit profile in a few ways. Your credit score will drop by a few points for a short period of time. This is because of the hard inquiries made by the credit check and the loan being reported to the three major credit bureaus.
Your credit score may improve after making several on-time payments and again after paying off more of the principal balance on your loan.
A new car loan may have several different effects depending on your credit score:
- Increasing your credit utilization
- Gives you a diverse credit mix
- Allows you to utilize installment loan effects of credit building
The key here is letting time do its thing. Keep your auto loan open and pay on time.
This contributes a great deal to the LENGTH of your credit history in your profile.
Do Car Payments Build Credit?
A car loan is a type of loan, similar to most student loans, mortgages, and personal loans. If you make at least the monthly minimum payment on time each month, the account should improve your credit score over time, even if you don’t pay off the balance completely.
Don’t buy a car or take out a car loan just to improve your credit score.
Auto loans can be costly. Interest payments add up quickly. Longer-term loan offers usually come with higher interest rates than shorter-term ones.
Don’t be fooled by having a lower monthly payment over a longer term as it just means you pay more interest. This makes the total cost of the car more expensive.
When looking at a car loan, if you make extra payments monthly, this can help you not pay as much interest and positively affect scores.
So when used right, car payments can build your credit.
How Long Does it Take for Car Payments to Improve Credit?
When you first get a new car loan, your credit may go down initially, but the impact is temporary.
Let’s take a look at what happens to your credit profile when getting a car loan:
New credit account:
You’re adding a brand new credit card to your credit report with zero payments. Once again, this has a temporary bad effect on your credit score.
Account age:
This is still a factor but is less important. It is essentially the length of time you have had your accounts open. So NEVER close an aged account as it helps your credit score. The only exception to the rule is if you can’t control your spending on something like credit cards. Even in this case, cut up the card and keep the account open.
It is difficult to say how fast your credit will improve as EVERY credit profile is different. One thing that is known is that having a car loan, which is an installment loan, paying on time OVER time, will be a positive impact on your credit score.
Types of Different Debt That Have an Effect on Your Credit Score
Any debt that is paid off in installments, including a car loan or mortgage, student loan, and personal loan, is considered installment debt.
Paying off installment debts is a good sign that your financial situation is stable and you’re able to manage and repay the debt when it comes due.
Credit cards are the most popular type of revolving debt. For example, HELOCs and personal loans are two other types of loans. This type of credit is usually paid for by, repaid, and then reused.
Using responsibly can help you improve your cash flow and build up a good credit score. Both of these things are important for a healthy financial life.
You can also learn a lot about this by going to one of the three credit bureau sites, like Experian, Transunion, or Equifax.
How Can I Raise My Credit Score by 100 Points in 30 Days?
If you want to build credit faster, do it the right way. Following these tips can raise your credit score by 100 points as long as you are consistent and disciplined. If you are looking to just build your credit, don’t rush out to get a car loan.
You can get installment loans that will help you do the same thing without the unnecessary risk and expense.
So for example, if you’re wondering how to get a loan for a car when you have bad credit, here are some of the best places to focus your efforts:
Stay on track with payments:
The key to raising your credit score is to stay on track with your payments and refrain from opening new accounts.
Eliminate hard inquiries:
Hard inquiries will stay on your credit report for two years, and negative items can stay on there for as long as seven, so there is no overnight fix that will raise your credit score by 100 points.
However, that doesn’t mean that you won’t see your credit score significantly increase in just a few months with proper care.
Remove negative items:
Try to remove any negative item from your credit report. This is a powerful way to improve your credit scores. This way, it doesn’t stay on your credit report for the full seven years.
Doing this will help you increase your credit score quicker, and you can see the improvement as quickly as the following month after the negative item has been removed.
Once you have taken care of all negative items on your credit report, you’ll need to maintain consistency each month.
Overall credit strategy:
Make payments on time, lower your credit utilization rate, and keep old credit card accounts open without opening new accounts.
Following these tips will be the key to improving your credit, and once your credit has improved, it will be easy to maintain from here on out and get better rates on the car loan.
Wrapping Up Credit Building Talk
Ultimately, you want to put the responsibility back on yourself to improve your credit.
For most people, no one has more influence on their credit than they do. By committing to making at least the minimum payment each month, you’re taking smart steps to improve the quality of your credit.
BUILDING CREDIT IS A PROCESS. If you NEED a car loan then manage it the right way.
If you are just looking to build credit, there are better ways with less hassle to do this. There are companies out there like Self.Inc that has the tools to do this.
Good luck with your building credit Journey!
How a Car Loan Affects Credit Scores: Explained
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.