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How Fast Will a Car Loan Raise My Credit Score? PLUS The Secret to Rate Shopping

How quickly your new car loan can improve your credit depends largely on what’s already on your credit report. 

Excellent credit and stellar payment histories can mean low impacts on your credit score. If your credit history is more complex, you could see a bigger dip and bigger rewards later. 

How Does a Car Loan Affect My Credit?

Getting a car loan affects your credit in different ways. First, your credit score drops by a few points temporarily. This is due to the hard inquiry from the credit check and the new loan being reported to the credit bureaus..

You’ll likely see your score rise after making several on-time payments and again when you pay down more of the principal balance. 

Depending on what your credit looks like, a new auto loan can have multiple effects: 

  • Diversifying your credit mix
  • Adding new credit
  • Initially increasing your credit utilization rate
  • Adding to your hard inquiries 
  • Lowering your average account age

Time is a big factor in raising your credit score. Keeping your auto loan open with timely payments, contributes greatly to your length of credit history. 

Hard Inquiries Shave a Few Points Off Your Score

Don’t panic if you see your score drop after the credit check from getting your new car loan. A hard inquiry hits your credit report whenever you apply for loans or credit accounts. 

The inquiry stays on your credit history for two years and decreases your score by at least two points depending on how many hard inquiries you already have. If you have a ton of inquiries already, the added one could denote a bigger risk to lenders. 

If you haven’t applied for credit in a while, the impact on your score might not be as drastic. 

Pro tip: Shop around for the lowest interest rate on that new car. Aim to include all inquiries within two weeks, and credit bureaus will only count it as one hard inquiry. This dramatically softens the blow to your credit score. 

Hard inquiries are typically a small deduction from your overall score. Since the auto loan is new credit, it also lowers the average age of your credit accounts which is 15% of your FICO credit score. 

A new account without payment history on your credit report will have a negative effect until your payments reflect consistently 100% on time. These temporary changes to your credit report will start to fade as you continue making payments to your auto loan.

Paying Your Loan On Time Adds to Your Payment History

Your payment history is a significant chunk of your credit score. FICO considers payment history to be 35% of their credit scoring model. But that’s not the only way your new car can contribute to building credit. 

Every payment you make towards your loan is reported back to each credit bureau. When you make a timely payment to your auto loan each month, you’ll see a boost in your score at key milestones like six months, one year, and eighteen months. 

Making your payments on time does the extra chore of paying down your installment debt as well. The more you pay down your loan balance, the lower your debt to income ratio (DTI) will be. 

You don’t want to be late or miss any payments because it has the opposite effect. Being 30 days late on a payment can seriously harm your credit score.

Installment Loans Help Diversify Your Credit Mix

Buying your new car can also have the added benefit of diversifying your credit mix. If your credit profile consisted of revolving credit accounts before getting your car loan, the new loan payments could contribute to how lenders score your credit mix.

When lenders review your credit report they want to see different types of credit with good payment histories and a good credit score. A good credit mix can include: 

  • Student loans
  • Secured credit cards
  • Prior auto loans
  • Personal loans
  • VA Loans 
  • Other revolving debt 

A healthy credit profile with various types of credit proves to a lender that you can responsibly manage multiple payments and due dates simultaneously. 

Installment loans can also help you improve poor credit by consolidating high-interest credit card debt to one low monthly payment. 

If you originally got your car loan at a higher interest rate due to low credit, you could refinance your auto loan to lower your monthly payments once your credit score has improved. 

How Long Does it Take for Car Payments to Improve Credit?

If you’re using your car loan as a method of building your credit, you might be asking “how fast will a car loan raise my credit score?” There’s no universal answer for this because everyone’s credit looks different. 

But there is a general idea of how long it might take based on what’s happened in your credit history. According to a study at Bankrate, the average time to correct certain credit issues is detailed in the chart below. 

Average Credit Score Recovery Time

EventAverage credit score recovery time
Bankruptcy6+ years
Home foreclosure3 years
Missed/defaulted payment18 months
Late mortgage payment (30 to 90 days)9 months
Closing credit card account3 months
Maxed credit card account3 months
Applying for a new credit card3 months
Source: https://www.bankrate.com/finance/credit-cards/how-long-does-it-take-to-get-a-credit-score-up/ August 20, 2021

For events that contribute to bad credit such as bankruptcy or foreclosure, it can take multiple years to repair your credit. If you’ve missed payments or gone over your credit limit, it may only take a few months for you to build your credit score back up. 

The best way to keep track of how quickly your score is improving is to watch your credit report closely. You can set alerts under your accounts with each credit bureau so you’ll know if anything changes. 

How Long Does it Take a Car Loan to Show Up on Your Credit Report?

Within the same day or first few days after applying you should see the hard inquiry for your car loan show on your credit whether you’ve been approved or not. 

Other potential lenders and auto loan companies see the inquiry too if you allow them to pull your credit. No worries—they won’t hold it against you if it’s within the 14-day window for it to be counted as one credit pull. 

When you decide which dealership or auto loan company to move forward with and finalize the deal, it can take up to 30 days from the start of the billing cycle for your loan to show up on your credit report. 

As mentioned earlier, this will show as new credit and will temporarily lower your score because of the heavy amount of new debt. 

The first payment will typically show on your report within a few days of processing the full monthly payment. This will start deducting from the total loan balance and reflect in your DTI ratio.  

Factors That Influence Your Credit Score

Most auto lenders use FICO credit scores to determine a consumer’s creditworthiness. A FICO score is made up of five factors

1. Payment History—35%

Your payments are the biggest factor in your overall credit score. It tells financial institutions your propensity for repaying the money that’s lent out to you as well as the level of risk for not repaying your debts. 

2. Credit Mix—10%

Shows your ability to manage multiple accounts, payment systems, and due dates. 

3. Amounts Owed—30%

This is also known as your credit utilization ratio. You should bring your credit card balances and loan balances to no more than 30% of your total credit limits. Ideally, you want them at 10% or less.

4. Length of Credit History—15%

Proves that you can manage accounts successfully over long periods. For this reason, if you have any long-standing accounts, you may want to avoid closing them even if they’re not in use. Closing one of your oldest accounts can do damage. 

5. New Credit—10%

Helps lenders see how much of your credit history might be too new to make an accurate determination of creditworthiness. 

Since the amount of debt you owe is one of the larger factors influencing your score, it may be helpful to consider a credit limit increase to avoid maxing out credit cards and lower your utilization rate. 

Consider A Credit Builder Account to Improve Your Credit Score

Before you head to the dealership to drive off with your new car, be sure to take the right steps to improve your credit and lower your debt obligations. 

Walking in with the best credit score lowers your interest rate, minimizes your monthly payments, and gives you more negotiating power. 

One of the best ways to improve your score is to open accounts that build credit.  One of those accounts is a credit builder loan. These secured loans report your monthly payments to the credit bureaus as a way to diversify your credit mix and demonstrate a strong credit history. 

One of the best credit builder accounts is a Credit Strong account. Credit Strong is part of a 5-star rated FDIC insured bank, and with one year of on-time payments, credit builder loan holders with Credit Strong raised their score by an average of 70 points! 

If your credit score is sitting firmly at 650, that could take you straight into the 700s. At the end of the loan, the money used to secure it is returned to you.

Looking for a quick boost? Within three months, the average Credit Strong account holder added 25 points to their score. 

All in all, buying a car isn’t the fastest way to improve your credit score, but as part of a long-term strategy, it proves to credit reporting agencies that you’re capable of meeting your financial responsibilities consistently. 

Just be sure not to skip any payments and you’ll be on the road to great credit in no time. 

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