A car purchase is a big decision, and it can affect your credit rating. Your decision on whether or not to use a car-loan for your next purchase will depend on a number of factors.
You can improve your FICO score by getting a car. A car loan may also enable you to refinance a mortgage or other loans in the future at a lower-interest rate.
How will an auto-loan affect your credit?
Your credit rating is based upon many factors, such as your payment history and credit history. Your credit score can be increased by having a long history of credit and making on-time payments.
Credit utilization ratio is one of the most important factors that determines your credit score. This ratio measures the amount of debt you have revolving compared to your total limit. 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.
Another factor your credit score considers is your credit mix, which reflects the different types of credit you have. The goal is to balance your debt between revolving and installment credit such as a credit card or a mortgage.
It is possible to improve your credit rating by applying for a revolving line of credit such as a credit card. You do not have to apply all at once. Doing so could send the wrong message to lenders that you're in financial trouble.
Credit scores also depend on the length and age of your credit histories. Your average account age can decrease after financing a new vehicle, and this can negatively affect your length-related score factors.
This can also have a negative impact on your variable amounts owed, which accounts for 30% of your score. Adding a new installment loan to your credit report increases the total amount you owe.
Many people pay off auto loans early. You should consider how early repayment of your car loan can affect your score before you do it.
Maintaining your auto loan with timely payments can have a positive effect on the length-related score factors that account for 15% your credit rating. The average age of the account drops when you close a car loan because it's not considered an active account.
A new auto loan can improve your credit score by helping you build a solid credit history and a reliable payment history. You should be aware that it may take some time for your credit score from a new car loan to improve.