Is it True That Buying a New Car Increases Your Credit Score?

Many times we venture to apply for a car loan without taking into account the factors that we must consider to obtain the best credit, one of them is to know our credit score to evaluate whether it is feasible to acquire a debt or not.

For most people, buying a car is a big deal. It takes time to save enough money for such a large expense. But auto loans allow you to buy a vehicle without having to put the entire amount together. But how does car financing work , what effect can it have on your credit score, and what should you keep in mind when buying a car? The answers to all these questions we will tell you here.

How do auto financing and loans work?

When you sign a new car loan, you borrow a full amount of money and then pay it back plus interest each month for a set period of time. The amount borrowed, the term of the loan, and the interest rate affect your monthly payment and the total cost of the loan.

You can reduce the amount you borrow by making a down payment or by offering your old car as a trade-in. The loan term, or the length of the loan, is typically 36 to 72 months. A longer loan term will lower your monthly payment but increase the total cost of the loan due to additional interest charges. The interest rate, or annual percentage rate (APR), is the annual interest on the loan. It is better to find the lowest possible rate so that you pay less in the end.

Does car financing help your credit score?

Applying for a car loan presents a rigorous investigation on your credit report. That takes some points off your credit score.

A difficult investigation means that someone has officially examined your credit report. Refinancing a car loan can also cause this to happen. And opening a new loan and adding debt causes a slight drop in your score . However, it will increase once you start paying the loan on time every month. This increase occurs because your loan payments add to your credit history. Your payment history can have a big effect on your credit score.

The three major credit bureaus – Experian, Equifax, and TransUnion – typically list auto loans as installment accounts, such as mortgages and student loans, on the credit report. Another factor in your score is your “credit mix.” So if you don’t have an installment loan yet, adding an auto installment loan can boost your credit score .

You can check your credit score online through the major credit bureaus. Free copies of your report can be obtained every 12 months. Otherwise, the agencies cannot charge you more than $ 13 for a copy of your credit report.

What to consider when buying a car?

Because applying for a loan requires a rigorous investigation of your credit report, it is not something you should do frequently. However, it’s a good idea to shop around for auto loans before you go to the dealership to make sure you get the best possible rate .

Fortunately, if you apply for multiple car loans in a short time, they will be grouped together and will count only once in calculating your credit score because it is clear that you are only buying one car. Your FICO Score, a type of credit score that creditors use to assess your credit worthiness, is set over a 30-day period, while Vantage Score uses a 14-day window. Some other scores do not include auto loan inquiries at all.

Knowing your credit score before shopping for an auto loan is a good idea because higher-scoring consumers receive better loan rates . Next, make sure you can afford the car you want to buy. When buying the car, compare the interest rates on the loans, bet, and keep the loan term as short as possible. It’s also a good idea to pay cash for fees and extras, like sales taxes or registration fees, rather than financing those extra charges.

Therefore, in the short term, getting a car loan can affect your credit score. But if you continue to repay the loan on time, your credit score will recover and even increase. One oddity to keep in mind is that canceling your loan also causes a slight temporary drop in your credit score.