How a car loan affects your credit score
If you are in the market for a new set of wheels and looking to buy with financing, you might be wondering: Does a car loan affect your credit score? This is definitely something to consider when taking out any type of credit product.
The reality is that all types of financing have the potential to affect your credit score, both positively and negatively, and at different stages of the borrowing process.
To better understand how a car loan could affect your credit rating, it helps to know how credit scores are calculated.
When determining your credit score, Australia’s major credit bureaus, Experian and Equifax, take a series of factors into consideration, including:
- Credit inquiries
- Credit used vs available
- Types of credit
- Refund history
- Length of credit history
The extent to which these factors can influence your credit score is not publicly available information. But it should be noted that a car loan can impact most of them in one way or another.
Will getting a car loan help my credit score?
Since the introduction of comprehensive credit reports, credit grantors are required to report positive credit events in addition to negative events.
This means that your car loan could indeed improve your credit score if you take the opportunity to consistently demonstrate responsible credit behavior.
By regularly making your car loan repayments on time and making a concerted effort to avoid late payments, your repayment history could benefit your credit score.
Could getting a car loan hurt my credit rating?
On the flip side, there are several ways a car loan could hurt your credit rating, including the following scenarios:
1. Submit multiple car loan applications:
Whenever you apply for credit, the loan provider will perform a credit check which is recorded in your credit report as a firm investigation. If you submit multiple auto loan applications at once, or in close succession, you could risk damaging your credit score.
2. Missing payments:
Forgetting to make your car loan payments, or paying them after the due date, could hurt your credit score. As a general rule, the longer the late payment, the more serious the event is likely to be and the more it could have a significant impact on your credit score.
But keep in mind that while a one or two day late payment isn’t the biggest risk to your credit score, chances are you’ll still be subject to late fees.
3. Repay your car loan:
This one might seem counterintuitive, but it should be noted that reaching the end of your car loan term and making your final repayment could lead to an initial drop in your credit rating. The main reason for this is that it will no longer be listed as an active account on your credit report, so if this is your only form of credit or your oldest account, the length of your credit history will be. shortened.
Longer credit history tends to be more desirable for lenders because it allows them to see your credit behavior over the long term. However, a potential reduction in credit rating resulting from a loan repayment will likely only be temporary – so there is no reason to delay that final repayment.
What credit score is needed to get a car loan?
Credit providers generally determine the interest rates for auto loans based on the credit score. Excellent credit borrowers will often be rewarded with the most competitive interest rates, while average or poor credit borrowers tend to be offered higher interest rates.
There is no specific credit score that will guarantee the approval of a car loan, but it is generally true that the higher your credit score, the more desirable you may be as a customer for lenders.
So while a car loan has the potential to both positively and negatively affect your credit score, doing your due diligence and managing your credit responsibly can give you the tools you need to protect it from harm. best possible.