The purchase of a vehicle is a major life event, but can also affect your credit score. The decision to buy a new car with a loan depends on several factors. These include how much money you have available and how you manage your credit.
You can improve your FICO score by getting a car. Take out an auto loan to be able to refinance mortgages, other loans and even your home at a low interest rate.
How Does an Auto Loan Affect Your Credit?
Your credit score is based on many factors, including your payment history and the length of your credit history. Credit scores can be improved by a good credit history.
Your credit score takes into account your credit usage ratio. This is how much revolving debt, or revolving loan payments, you have in comparison to your total available credit. Having too many revolving accounts can reduce your credit score. To avoid this, keep your balances down and pay them off as soon as you can.
The credit mix is a second factor which affects your score. It represents the various types of debt you hold. The goal is to balance your debt between revolving and installment credit such as a credit card or a mortgage.
Applying for new revolving credits, such as new credit cards, can help improve your credit score. However, you do not need to apply for them all at once. You could be sending the wrong message to your lenders by doing so.
Credit scores also depend on the length and age of your credit histories. If you are financing a brand new car, the average age of each account may drop slightly. This could have an adverse impact on your length related scoring factors.
Your credit score can be negatively affected by the amount of money owed. This variable accounts for 30 percent of your credit rating. Your total debt increases if you add another installment loan to the credit report.
It is common for people to pay off their car loan early. Paying off an auto loan early can affect your credit score negatively.
Your credit score will be positively affected if you keep your auto loan active and pay on time. The length-related scoring factor accounts for 15%. If you close an automobile loan, the average age of your account will decrease because it is no more considered active.
A new car loan will have a positive effect on your credit rating as it allows you to establish a good credit history. Remember that your credit score may not improve immediately after a car loan.