How a Car Loan Affects Your Credit Score How a Car Loan Affects Your Credit Score
shares Facebook Twitter Google+Whenever you take out a loan, your credit score is affected. If you pay your loan when the payments are due,... How a Car Loan Affects Your Credit Score

Whenever you take out a loan, your credit score is affected. If you pay your loan when the payments are due, on time each month, it will have a positive impact on your credit score. However, just one late payment can have a negative effect on your credit score. Credit scores can both make or break whether your loan is approved and determine what interest rate you end up paying. If you have a higher credit score, you will be able to get loans with a low interest rate. Yet, if you have a lower credit score, it almost always means you are going to pay a higher interest rate. The difference between a few interest points may not seem like a big deal, but over the length of the loan, it can add up to loads of money.

A key part of your credit mix is the installment loan

One way you can build your credit with the credit reporting bureaus and lenders is to make sure you have a good mix of revolving credit that include installment loans, such as a car or mortgage loan, and credit cards. A home loan can help you give your credit score a boost, but not everyone is in a position to own a home at this time. Qualifying for a car loan is easier, and, as an installment loan, it can give your credit score a nice boost.

Late payments can also negatively impact your credit score

Just as making payments on time helps you build good credit, making late payments has the opposite effect and leads to poor or bad credit. A single late payment can have a negative effect on your credit score, and it can make it more difficult to get a loan in the future. If you believe you are going to be making a payment late, it is best to call your lender, tell them what is happening, and ask them for an extension. Working together with your lender, you can come up with a solution that will have the least negative effect on your credit score.

Keep in mind that when you make consistent and steady payments, it shows lenders that you are a lower risk when you borrow money. And that when it comes to handling big debt down the road, you will be reliable, like when you get a mortgage. Getting a car loan can be an excellent building block to building strong credit.

[Featured image credit: "Car Loan” by NY , used under CC BY-SA 3.0/ Color filters, image cropped]

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