Do you know the multiple ways a car loan affects your credit score?

A car loan can be a great way to begin credit history if you don’t have any credit yet. Those who have yet to get a credit card, student loan, or other form of credit can majorly benefit their credit score with a car loan. But as with any type of loan, there are ways it can affect your score positively and negatively. Be aware of the following points to make sure your car loan helps your credit score-not lower it.  

How a Car Loan Relates to Your Credit Score

July 3, 2017

Do you know the multiple way a car loan affects your credit score?

A car loan can be a great way to begin credit history if you don’t have any credit yet. Those who have yet to get a credit card, student loan, or other form of credit can definitely benefit from a car loan. But as with any type of loan, there are ways it can affect your score positively and negatively. Be aware of the following points to make sure your car loan helps raise your credit score-not lower it.

Type of Loan

Lenders and credit reporting agencies like to see a variety of credit and loan types when they check your account. The two types of credit are revolving and installment. A car loan qualifies as an installment loan, meaning you make a pre-determined payment each month on a set loan amount. Adding a car loan to your credit mix can help diversify your credit report, giving your score a boost. It’s also a great way to start your credit history, since they are much easier to qualify for than a home mortgage and allow you to prove responsible credit habits.

On Time Payments Matter

Once you have your car loan, it’s incredibly important to be responsible with it. This means always making your payments on time. Just one late payment can ding your credit score, and multiple late payments can really bring it down. But if you keep on schedule and always make your payments on or before their due date, you will see your credit score slowly rise as you prove you can be responsible with credit. If you ever believe you will be late on a payment, call your financial institution as soon as possible to see if you can work out a plan to help you avoid a late payment.

Be Aware of Any Mistakes

There are many sites you can use to help monitor your credit, such as CreditKarma.com or AnnualCreditReport.com. Use them to keep on top of your credit information and what is being reported on your account. If you ever see an error, such as a report of a late payment when it was actually on time, make sure to dispute the error so it can be corrected. It doesn’t happen often, but if you have an error on your report, it could negatively affect your score, even though you didn’t actually do anything wrong!

Your Current Loan Can Affect Future Loans

At some point, you will need to buy another car. By making your payments on time and slowly raising your credit score, you’ll be able to receive a better interest rate on your next loan. The higher your credit score, the more responsible creditors and lenders see you as, equaling lower interest rates on loans and credit cards.

Getting a car loan is an important part of your credit score, and if you are smart and responsible with it, you will soon see your credit score reflecting positively. If you’re just starting out and searching for a car loan, see tips here. Have you seen your credit score raise after adding a car loan?

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