Justin Cupler
Contributing Writer at Tally
May 3, 2022
Whether new or used, buying a car often means taking out a car loan to complete the transaction. A car loan can help build credit, but the positive effects on your credit score aren’t immediately obvious. This might leave you wondering, “How fast will a car loan raise my credit score?”
Below, we explore:
How an auto loan can impact your credit
How quickly it can raise your credit score, which is especially useful if you have no credit or bad credit and need to rebuild
How fast will a car loan raise my credit score?
Taking out a car loan can help increase your credit score. However, the time it takes to improve your score and how much your FICO credit score will increase depends on your current credit report.
If you already have a solid credit report with good credit score factors in place, you may start seeing positive impacts after making your first on-time payment.
For reference, the credit score factors we’re referring to include:
Payment history
A favorable payment history means you make your payments on time and have no collections accounts in your name. This factor also considers:
How long overdue your accounts are
How much you owe on your delinquent accounts
The number of overdue accounts you have
How long the overdue accounts have been on your credit report
Amounts owed
Five pieces of information comprise the amounts owed variable, including your:
Credit utilization ratio, or the total amount of revolving debt you have relative to the total credit limit you have
The amount you owe to all accounts
The amount owed to different types of accounts
How many accounts have balances
How much you still owe on your installment loans
The less you owe — particularly on revolving accounts — the better it is for your credit score.
Length of credit history
This is essentially the age of your credit. It considers:
How long your credit accounts have been open
The age of your oldest account
The age of your youngest account
The average age of all accounts
The age of specific account types
How long it’s been since you used your accounts
An older credit history can impact your credit score for the better.
Credit mix
This variable looks at how many revolving debts — credit cards, lines of credit, retail store cards, etc. — you have relative to your installment debt. Installment debt includes most fixed-term loans, like student loans, car loans, mortgages, etc. The goal is to have a fairly even mix of the types of credit.
New credit
This variable looks at:
How many new accounts you have
How many recent hard credit inquiries you’ve had
How long it has been since you opened a new account
A lot of new credit can hurt your credit score.
While many factors come into play when calculating your FICO credit score, you may start to see your auto loan raise your credit score in as few as 60 to 120 days. But remember, everyone’s credit situation is different, so your results may vary.
How can a car loan raise my credit score?
A car loan could have a positive effect on your credit score. Here are some common ways an auto loan may boost your score.
Making on-time payments
Making on-time payments to your lender will positively impact your payment history variable, accounting for 35% of your FICO Score.
You should try to make your car payment by the due date to avoid any late fees, but you won't receive a late-payment mark on your credit score as long as you’re within 30 days of the due date.
The credit score improvements from making on-time payments are more long-term improvements, which can take months before you see significant score increases.
Balancing your credit mix
If your credit mix, which accounts for 10% of your FICO Score, is nothing but revolving credit, it could negatively impact your credit score. Getting an auto loan into the mix may help increase your score slightly.
This can result in a quick score improvement, as it takes effect as soon as the new loan shows on your credit report. However, the improvement will be slight because it accounts for just 10% of your credit score.
Can a car loan lower my credit score?
A car loan can help you make credit score improvements in the long term. However, the short-term ramifications of taking out a new car loan may initially cause your credit score to fall.
Taking on a hard credit inquiry
The lender will perform a hard inquiry on your credit profile to approve you for a car loan. These hard inquiries negatively impact your new credit variable, which can temporarily drop your credit score.
Fortunately, FICO only considers hard credit checks performed in the last 12 months when calculating your credit score, and after 12 months, that inquiry no longer impacts credit score.
Adding a new account to your credit report
Adding a new account to your credit report factors into the new creditFICO variable, and the same goes when you add a new car loan to your credit report.
This impact will occur as soon as the lender reports your loan to the credit bureaus, so the effect can be immediate. Since new credit makes up just 10% of your FICO score, the impact will be small and fade with time.
Shortening your length of credit history
When you add a brand-new car loan to your credit report, it’ll shorten your length of credit history. The exact impact will depend on the age of your other accounts and how many accounts you have.
The negative impact can happen as soon as your loan is reported to the credit bureaus by the lender. Fortunately, since the length of credit history accounts for only 15% of your credit score, it likely won’t have a significant impact.
Increasing amounts owed
Adding a new installment loan to your credit report increases the overall amount you owe. This can have a negative effect on your amounts owed variable, which factors into your FICO credit score calculation.
Like the others mentioned here, this impact will be nearly immediate. Unfortunately, the amounts owed variable makes up 30% of your credit score, which can be a significant effect. Your credit score could look very different if you already use a lot of your available credit when you take out a car loan.
Will an auto loan impact all of my credit reports?
It might seem like your credit score is a single number attached to your credit history and utilization, but you have three credit reports. Each major credit bureau — Experian, Equifax and TransUnion — issues a distinct credit report. Your FICO Score will vary based on which credit report is used to calculate it.
Information about your car loan, like the balance, terms, interest rate and payment history, can impact your credit report, but it depends on what your lender shares with the credit bureaus. Not all lenders report loan information to all three credit bureaus, and only the credit bureau your lender reports to will incorporate your loan information into your FICO Score.
For example, if your lender only reports to TransUnion, your on-time loan payments won’t impact your FICO Scores from Experian and Equifax.
It may take time, but an auto loan can raise your credit score
You may see a quick credit score drop when you initially take out an auto loan. This is normal. As the life of your loan progresses, your on-time monthly payments could raise your score and start you on the track of building credit and developing a high FICO Score.
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