Please Note: Credit Union of Southern California does not offer Membership or loans to non-California residents (other than former CA residents who were already Members or Preferred Partner Members working in out of state locations).
How Fast Will A Car Loan Raise My Credit Score?
Although making on-time monthly payments will eventually lead to a higher credit score, most car buyers will first experience a temporary reduction in their credit score.
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In short, buying a car can be a good way to build your credit score over the life of the loan, but it's more of a long-term credit building strategy.
Buying a car does help your credit, but never buy a car just to raise your credit.
In this article we’ll answer the question, “Does financing a car build credit”, and provide some additional details as to how credit scores are determined and what you can do to improve your current credit standing.
Credit Union of Southern California (CU SoCal) is the fastest growing credit union in Southern California, providing checking, savings, and loan products with quick pre-approvals, no application or funding fees, and more! Please note we do not offer Membership or loans to non-California residents (other than former CA residents who were already Members or Preferred Partner Members working in out of state locations).
Call CU SoCal at 866.287.6225 to schedule a free no-obligation auto loan consultation, or apply online today!
Factors That Influence Your Credit Score
Several factors affect an individual’s overall credit score. As we go through life and acquire and use different types of credit, these experiences will make our score fluctuate over time.
Generally, large fluctuations up or don’t won’t happen unless you take on large credit like a home mortgage, or fail to pay a mortgage or car loan.
Here’s how FICO (the most popular credit scoring model, used by most lenders when evaluating an applicant's creditworthiness) ranks these various factors:
Payment History: 35%
The first thing any lender wants to know is whether you've paid past credit accounts on time. This helps a lender figure out the amount of risk it will take on when extending credit. This is the most important factor in a FICO Score. Be sure to keep your accounts in good standing to build a healthy history.
Amounts Owed: 30%
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. However, if you are using a lot of your available credit, this may indicate that you are overextended—and banks can interpret this to mean that you are at a higher risk of defaulting.
Length of Credit History: 15%
In general, a longer credit history will increase your FICO Scores. However, even people who haven't been using credit for long may have high FICO Scores, depending on how the rest of their credit report looks.
New Credit: 10%
Research shows that opening several credit accounts in a short amount of time represents a greater risk—especially for people who don't have a long credit history. If you can avoid it, try not to open too many accounts too rapidly.
Types of Credit (Credit Mix): 10%
FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don't worry, it's not necessary to have one of each.
Other Debt That Affect Your Credit Score
This type of debt is any that is paid in installments, usually monthly payments, including a car loan, mortgage, student loan, or personal loan. Paying down installment loans is a good sign that you're able and willing to manage and repay debt.
The most popular type of revolving credit is credit cards. Other examples include a Home Equity Lines of Credit (HELOC) and personal loans. This type of credit can be drawn from, paid off, and used again. When used responsibly, revolving credit
can help you manage your cash flow and build a good credit score—both of which are key to a healthy financial life.
Does Buying A Car Help Your Credit Score?
The credit bureau Experian
tells us that when you apply for loans to shop for the best rate, each lender you apply with will request a credit check that causes a hard inquiry
to be entered on your credit report. This typically causes a small reduction in your credit score. When you sign for the loan, you'll typically see another small score dip.
The good news is financing a car will build credit. As you make on-time loan payments, an auto loan will improve your credit score. Your score will increase as it satisfies all of the factors the contribute to a credit score, adding to your payment history, amounts owed, length of credit history, new credit, and credit mix.
Other Ways to Improve Your Credit Score
The most important action you can take when you’re trying to build or raise your credit score is to make on-time payments for any loans or debt you have.
Skipping payments or making late payments not only results in high penalty fees and added interest on your balances, non-payment and late payments can dramatically hurt your credit score and possibly prevent you for getting credit and good loan rates on future loans.
For more details read, “How to Rebuild and Approve Your Credit Score?
Why Savvy Consumers Choose CU SoCal
We understand you’re more than a credit score, which is why CU SoCal lends on character and not just on credit scores. If you’ve been turned down for an auto loan because of a low credit score, or need help buying a car with bad credit, we can help. Learn more.
Please note CU SoCal does not offer car loans to individuals with FICO scores below 600, nor to non-California residents (other than former CA residents who were already Members or Preferred Partner Members working in out of state locations).
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Please give us a call today at 866.287.6225 to schedule a no-obligation consultation with one of our auto loan experts.
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