How Fast Will a Car Loan Raise My Credit Score?

By Eric Rosenberg
Reviewed by: Lauren Bringle, AFC®
Published on: 04/08/2021

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 raise your FICO® credit score.

So, does a car loan affect your credit score? 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 will probably hurt your credit score at first. But that negative impact is only temporary.

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. Learn more about the differences between credit report vs. credit score.
  • 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.
  • Lower average account age: One of your less-important credit score factors 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.

In my personal experience, the total negative of opening a new account is around 10 or 20 points plus another two to four points for the inquiry.

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.

After a few months of making your 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.

Do car payments 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 at least the minimum payment by the due date every month, the account 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 probably pay less for the car overall.

Paying off your car loan early by making extra payments or making larger payments every month can further help your credit score while saving you money on interest.

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

If you want to raise your credit score by 100 points in 30 days, you shouldn’t rush to buy a car with a loan. If you do, your credit score will probably be lower after 30 days. A

As discussed above, however, the loan will 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 improve your credit in a hurry, these are the best places to focus:

  • Pay off revolving debt balances: One of your credit score’s biggest factors is your credit card balance. If you can pay your credit card balance off to zero, you should see an improvement to your credit score the next month when your balance is updated. Contrary to a popular myth, carrying a balance of revolving credit from month-to-month doesn’t help your credit at all.

  • Pay on-time going forward: This won’t have an immediate impact on your credit, but it is one of the two 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 raise 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 lowers your average credit age. Any kind of tinkering, aside from paying off debt, is more likely to hurt your credit than help it.

If you aren't in a hurry, a car loan can help you build your credit over time. But the big interest rate expense makes it a costly way to build credit.

How long does a car loan affect your credit?

The impacts of a car loan start with the first inquiry on your credit score.

The car loan remains on your credit for the life of the loan plus another 10 years. If you have a five-year car loan, for example, the loan will affect your credit for a total of 15 years.

Because car loans and other borrowing stays on your credit report for so long, it’s important to pay on time every month. A single missed payment may not do a ton of damage, but it will remain on your credit for the better part of a decade.

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

Manage your credit like a boss

Some people like to blame credit card companies or lenders for their poor credit.

But for most people, there is no one more influential on your credit than you. When you commit to always make at least the minimum payment by the due date going forward, you are taking smart steps to improve 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 tools like Self or other credit-building tools to help build your credit and increase 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.

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 and Twitter.

About the reviewer

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

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).

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Written on April 8, 2021
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