The credit application you fill out for a car loan can temporarily lower your credit score, usually by fewer than five points, according to the MyFICO website. After a year of paying your loan, this black mark will have disappeared, and your credit may improve if you have a history of on-time payments and have avoided taking on excess debt.
As long as you make timely payments and don't take out additional loans, your credit score should recover from the initial drop from opening from a new account and should continue to go up as you pay down your car loan. However, the specific amount your score changes depends on your debt load and unique credit profile.
Timely Car Loan Payments
The most important factor in your credit score -- accounting for about 35 percent of the total score -- is a history of timely payments. If you make payments on time every month, your credit score should go up. However, a single late payment can ding your credit, and if the loan is large, the timely payment history might not be enough to compensate for the increased debt load. Set up payments to automatically withdraw to give yourself the best chance of paying on time every month without fail.
Car Loan Debt Load
Your overall debt load is the second most important factor in your credit score, contributing to 30 percent of the total. If you take out a massive car loan or if you already have significant other debts, your car loan could actually harm your credit. However, if you quickly pay down the loan by paying it off or by paying more than the monthly minimum payments, you could still see an improvement in your score. Try to resist using credit to purchase other items while you're working to build your credit score. If you have credit cards, work on paying them off rather than increasing your balance.
Role of Other Factors
It's impossible to analyze the effect of any single credit item taken in isolation, because your credit score is the result of your entire credit history. Even if you make timely payments on a relatively small loan, taking out several other loans, missing payments on another loan or closing multiple credit accounts can cause your score to plummet. Consequently, it's wise to focus on ensuring each account remains up to date and in good standing.
Anticipating Score Changes
There's no single number of points that a car payment or loan adds or subtracts from your credit score. Instead, your total score is a result of all the items on your report. If you only have one loan, then the payments you make will more significantly affect your score than if you have several loans and a handful of credit cards.
- MyFICO: What Are Inquiries and How Do They Affect My FICO Score?
- MyFICO: What's In My FICO Score
- MyFICO: Credit Checks & Inquiries
- Advantage CCS: How Many Points Does Your Credit Score Drop If You’re Late on a Payment?
- CreditCards.com: Credit Utilization: How This Key Scoring Factor Works
- Experian. "Hard vs. Soft Inquiries on Your Credit Report." Accessed Feb. 21, 2020.
- myFICO. "What's In my FICO Scores?" Accessed Feb. 21, 2020.
- USA.gov. "Credit Reports and Scores." Accessed Feb. 21, 2020.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.