As you make timely loan payments, an auto loan can help you build a positive credit history and improve your credit rating. Your score will increase as you meet all the factors that contribute to a credit score, such as payment history, amounts owed, length of credit history, new credit, and credit mix. But it is important to remember that if you don't pay on time, it will hurt your credit. When applying for a car loan, a thorough investigation into your credit report is conducted. This can cause a slight drop in your score.
Refinancing an auto loan or opening a new loan and adding debt can also cause this to happen. However, once you start repaying the loan on time every month, your score will increase. This is because your loan payments add to your credit history and payment history has a big effect on your credit score. When you buy a car and purchase a loan for it, your credit report will reflect the additional debt that will affect your credit rating. Depending on the price of the car and the amount of the loan, the points dropped may vary. Fortunately, if you apply for multiple auto loans in a short amount of time, they will be grouped together and counted only once in your credit rating calculation because it's clear that you're only buying one car. Making minimum monthly car payments on time will improve the payment history factor in the FICO rating model. If you pay off your car loan early and never had late payments, the account will continue to improve your credit score until it is removed from your credit report for up to 10 years. If you can't get a car loan because of bad credit or limited credit history, there are other ways to build credit.
When considering whether car financing is a smart option for generating credit, it is important to remember that late or late payments will negatively affect your payment history factor and could significantly lower your credit score.