The impact of car loans on your credit score

Deciding to take out an auto loan can affect many parts of your life. It can affect how much money you have left in your budget at the end of every month and how you get to work each day. One aspect of your life that can potentially change when you get an auto loan is your credit score. It's crucial to understand the different ways that getting an auto loan can affect your credit score so that you can determine whether or not getting one is the right choice for your financial goals.

It Can Improve Your Credit Mix
One essential part of your overall credit score is your credit mix. When determining your creditworthiness, the credit bureaus want to see that you have a healthy mix of different types of credits. Some examples of credit types include revolving credit like credit cards, installment loans like auto loans, and student loans. If you currently don't have any installment loans or you only have a couple, getting an auto loan can help to increase your creditworthiness for the installment loan portion of your credit mix.

It Can Strengthen Your Payment History
After taking out a car loan, you'll have to pay on that loan every single month until the end of your established term. Every one of those on-time payments that you make helps to strengthen the overall payment history of your credit score. It's important to note that your payment history is the biggest factor in determining your overall credit score. The more accounts you have with on-time payments, the higher your credit score is going to be.

An Inquiry Can Temporarily Lower Your Credit Score
Whether you're getting a new auto loan or you're looking to refinance your existing auto loan, most lenders will pull a hard inquiry about your credit. Every hard inquiry that you get will slightly decrease your credit score over the short term. Most individuals will only notice a slight decrease for about a month.

One common question that people get is, how many times can you refinance a car According to Lantern by SoFi, "Theoretically, if you're careful, you could refinance your car several times without incurring any serious problem." It's crucial to note that every time you do refinance your auto loan, you're going to experience that temporary dip in your credit score.

It Can Lower Your Average Age of Accounts
Another essential factor that credit bureaus utilize to determine your credit score is the average age of all your active accounts. Typically, the longer you have an account open, the higher your credit score is going to be. When you take on a new auto loan, it will decrease the average age of your active accounts. Depending on how many active accounts you have and their age, getting an auto loan can negatively affect your credit score.

Deciding to get an auto loan is one that you'll need to always consider the consequences of how it will reflect on your existing credit score. By understanding these changes, you can better position yourself to maintain a high credit score with your new auto loan.


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