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Does Financing a Car Build Credit Score?

Does Financing a Car Build Credit Score?

Taking out any type of loan, such as a car loan, basically affects your credit score by causing a slight dip. However, it is only for a limited time, and the more timely you make payments, the faster your credit score tends to recover and then start increasing your score.


Therefore, it is essential to understand how a car loan affects and reduces your credit score.

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Car Loan Affects On Credit Score

Upon your decision to purchase a car, pay your dealer a visit.


Once you find a car, you will be required to fill out the paperwork and then the dealer will run a credit check, in which a hard inquiry will be generated on your credit report.


The hard inquiries generated will decrease your credit score by about 6 to 10 points for up to a year. In cases where you have between a good and excellent credit score, there could be a slight difference in these points.


Canada Drives How Credit Score is Calculated

Source: Canada Drives


When a series of hard inquiries are generated, it could eventually reduce your credit score to the barest minimum, making you miss out on other amazing rates.


Although, the credit bureaus have been able to come to an understanding that a lot of people tend to apply for a house and a car loan together.


Therefore, the credit bureaus have come to consider multiple inquiries of the same type that are within a timeframe of 14 to 45 days as a single inquiry.


No confusion should be caused between hard and soft inquiries.


For "soft inquiries," the lender reviews your credit report in order to use it only for purposes other than accessing credit.


This has much less of an effect on your score and shouldn’t make it change at all.


How Do Car Loans Build Your Credit Score?

As earlier stated in this article, the hit on your credit score is only temporary and will go away with time. Therefore, as long as your payments are on time, then the positive effects last for the whole duration of the loan.


Your credit mix, which comprises about 10% of your total credit score, improves when you apply for a car loan.


For instance, one thing that assures lenders is that they are sure that you can handle various types of accounts maximally when considering you for a loan.


There are basically 3 types of accounts, which include revolving accounts such as credit accounts, installment loans, and open accounts.


In conclusion, don’t be surprised when you see your credit score take a hit after closing a deal on your car loan. Endeavor to have your monthly payments paid on time and you'll see that over time car loans improve your credit score.


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