You might have heard that buying a car can help to boost your credit score. But can it really? The answer to this question is yes it can, eventually. As long as you keep paying your car loan on time, having a car loan on your credit report will help your credit score to rise. There are other factors to consider, however, that may affect your credit when getting an auto loan.
Auto Loans in the United States
The Quarterly Report on Household Debt and Credit for 2017 by the Federal Reserve Bank of NY notes that the average auto loan for a new vehicle was $31,099 that year. This averages to a monthly payment of $515. For a used car, the average auto loan in 2017 was $21,375, with a monthly payment of $398. Depending on an applicant’s credit score, interest rates on the loan varied, from a low of five percent to a high of 12 percent.
The Federal Reserve Bank of NY also notes that in 2017, auto loans comprised almost 10 percent of an individual’s personal debt. It is estimated that 44 percent of all Americans were using an auto loan to pay for their vehicle that year. Additionally, in 2017, lenders shelled out a total of $1.129 trillion in auto loans across the United States.
Auto Loans and Your Credit Score
If you are contemplating buying a car using an auto loan, you are probably wondering how your credit score will affect your ability to obtain the loan. The median credit score most auto loan companies seek in an applicant is 707. This does not mean, however, that you cannot obtain an auto loan if your credit score is lower than this number. You will simply be paying more in interest charges on the loan. You also have the option of securing your auto loan using collateral, such as your car. Keep in mind that doing this does increase the risk of losing your car if you cannot pay the loan, as your car would then be repossessed.
When you initially apply for an auto loan, a hard inquiry will be placed on your credit report. If your report is sent to multiple lenders, there may be a new inquiry from each separate lender who has reviewed your credit report. This will make your credit score dip a bit for a short while. But, many credit agencies will view all of the inquiries as one inquiry, so that your credit report won’t be hit as hard as it would be with multiple inquiries.
Buying a new car with an auto loan does place more debt on your credit report, which can also make your credit score drop for a bit. This is because anyone who might be thinking of extending you credit does not know yet if you can handle this auto loan. Once you have a good payment history with the auto loan, having that loan on your credit report should help to improve your credit score.
Think about your timing when you are considering applying an auto loan. If, for example, you are also contemplating taking out a mortgage to buy a home or refinancing your current mortgage, you probably don’t want to be doing that at the same time as when you are applying for a car loan. Not only will your credit score drop each time a new loan is originated, but the added debt to your credit report can make it more difficult to obtain another loan (whether it’s the auto loan or mortgage that comes second).
Can you examine what is on your credit report? Yes. In fact, every year, you can get a free copy of your credit report. Whether or not you are applying for any loans, this is a good idea to make sure that all of your accounts are correctly reported. If it has been over 12 months since you have requested one, go to this link to get your free credit report from all three credit bureaus (Experian, Equifax and Trans Union). If you play your cards right, your new auto loan will eventually boost your credit score!