How Fast Will a Car Loan Build My Credit Score?

If you’ve only had credit cards and are considering your first car loan, you may want to know how fast a car loan could build your FICO® credit score.

So, does a car loan affect your credit score, and can a car loan build your credit? Keep reading to learn more about how car loans show up on your credit report and influence your credit score so you know what to expect.

How long does it take for car payments to improve credit?

When you sign up for a new car loan, it may probably hurt your credit score at first. But that negative impact may be only temporary. ^[1]

Here’s what happens to your credit when you get a new car loan:

• New inquiries: The first ding to your credit rating happens before you even open a credit account. By applying, the lender will likely request a copy of your credit score and credit report. Each inquiry related to a new credit application is called a hard credit inquiry on your credit report and may have a small negative impact on your FICO credit score. Hard inquiries remain on your credit report for two years.
• New credit account: When you open a new account, you’re adding a brand new credit account to your credit report with no payment history. Again, this has a temporary negative result for your credit rating. ^[2]
• Lower average account age: One credit score factor that accounts for 15% of your FICO score is your average age of credit (meaning how long you've had credit lines). Adding a new account lowers your average age, which could cause a credit score drop.

The impact of opening a new credit account varies depending on your unique credit history. If you apply for several car loans in a short period of time to shop around, credit scoring models may treat the group of inquiries as a single inquiry for credit scoring purposes. ^[3]

After a few months of making your on-time payments, however, you will have an established account with a payment history. At this point, you may see the negative impacts of the new account turn into a benefit because of your new on-time payment history.

Does buying a car build credit?

An auto loan is a type of installment loan, like most student loans, mortgage loans, and personal loans. As long as you make the monthly payment by the due date every month, a car loan should help your credit score over time.

You shouldn’t buy a car or get a car loan just to build credit.

Auto loans can be expensive. The interest payments add up. Longer-term loans typically come with higher interest rates and higher total interest charges.

If you find yourself in a position asking, “Is it a good idea to refinance a car?” or “Does refinancing a car hurt your credit?” There are several considerations such as an extended loan term and how this will affect your interest rate and credit score.

Don’t be lured by a lower monthly payment over a longer loan term since you will typically be paying more in interest. If you can afford a higher monthly payment on a shorter-term loan with a lower interest rate, you will pay less for the car overall.

Paying off your car loan early by making extra payments or making larger payments every month can also save you money on interest.

Does leasing a car build credit?

Leasing a car can help build credit, in a similar way that buying a car on finance helps build credit. Because you are making monthly payments with a lease, as long as the leasing company reports to the major credit bureaus (Experian, Equifax, and TransUnion), your payments will be included on your credit report.

Providing that you make your payments on time, a car lease can help build your credit. However, like with a car loan, you shouldn’t enter into a lease agreement just to build credit.

How can I build my credit score by 100 points in 30 days?

There is no guarantee that you can build your credit score by 100 points in 30 days, and you should not buy a car with a loan in order to try and do this.

Having a car loan can help your credit over time as long as you always pay by the due date.

Your credit score is made up of multiple factors, but the biggest ones that you may be able to fix in 30 days can be a tall order.

If you are wondering how to get a car loan with bad credit and want to take the necessary steps to bump your credit in a hurry, these are a few places you could consider focusing on:

• Pay off revolving debt balances: One of your credit score’s biggest factors can be your credit card balance. Consistently paying off your credit card balance each month can contribute to lifting your credit score over time. ^[4]

• Pay on-time going forward: This won’t have an immediate impact on your credit, but it is one of the largest factors in your credit score. A perfect on-time payment history takes years to build after a string of past mistakes, but there’s no better time to get on track than today.

• Don’t apply for new credit: In the section above, we looked at how credit checks and inquiries for new accounts can temporarily lower your credit score. If you want to bump your credit score quickly, don’t apply for any new credit cards or loans.

• Don’t close any credit accounts: Just as opening new credit accounts lowers your average age of credit, closing accounts can lower your average credit age.

How many points will a car loan lift my credit score?

There is no set number of points that a car loan can lift your credit score by as there are many other factors that play into your credit score.

How long does a car loan affect your credit?

The impacts of a car loan start with the first inquiry on your credit score. There is no set time frame for how long it will take for your credit score to change after financing a car.

Accounts with no late payments may remain on a credit report for up to 10 years from the date they were paid off and closed. If you have a five-year car loan, for example, the loan will affect your credit for a total of 15 years. If you have any late payments on your car loan account, they will remain on your credit report for seven years, and then be automatically removed. If the account was delinquent when it was paid, it will be removed from the report seven years after the delinquency date. ^[5]

Because car loans and other borrowing stays on your credit report for so long, it’s important to pay on time every month.

It’s much easier to start with a good credit score than turn around bad credit.

Manage your credit like a boss

For most people, there is no one more influential on your credit than you. When you commit to always make the monthly payment by the due date going forward, you are taking smart steps to upgrade your credit.

By responsibly managing your credit, the question of “what credit score do car dealers use to determine interest rates and approve applications?” will be less of a concern.

If you need a little extra help building credit, consider Self or other credit-building tools to help build your credit and your savings. Once you do this, you can work towards your larger life goals - like buying a car. When you take charge of your credit, you can manage your credit ... like a boss.

Sources

1. Experian, ‘How Does Buying a Car Affect Your Credit?’ https://www.experian.com/blogs/ask-experian/how-does-buying-a-car-affect-your-credit
2. Savvy Money, ‘Opening New Accounts May Impact Your Credit Score’ https://education.savvymoney.com/credit/opening-new-accounts-may-impact-your-credit-score/
3. Equifax. ‘Understanding Hard Inquiries on Your Credit Report’ https://www.equifax.com/personal/education/credit/report/articles/-/learn/understanding-hard-inquiries-on-your-credit-report/
4. Consumer Finance, ‘Will Paying Off My Credit Card Balance Every Month Improve My Score? https://www.consumerfinance.gov/ask-cfpb/will-paying-off-my-credit-card-balance-every-month-improve-my-score-en-1293/
5. Experian, ‘When Are Accounts Updated to Show Paid in Full? https://www.experian.com/blogs/ask-experian/updating-an-account-to-show-paid-in-full

About the author

Eric Rosenberg is a former bank manager and corporate finance worker with a bachelor’s degree and MBA in finance. See Eric on LinkedIn.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor®. Self is a financial technology company with a mission to help people build credit and savings.

Editorial Policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).