A car purchase is a big decision, and it can affect your credit rating. Whether or not you buy your next vehicle with a car loan can depend on several factors, including how much you want to spend and how well you manage your credit.
A car loan is a great way to build or improve your credit score. Take out an auto loan to be able to refinance mortgages, other loans and even your home at a low interest rate.
How Does an Auto Loan Affect Your Credit?
Your credit rating is based upon many factors, such as your payment history and credit history. A long credit history, as well as on-time payment can help increase your credit rating.
Credit utilization ratio is one of the most important factors that determines your credit score. This ratio measures the amount of debt you have revolving compared to your total limit. Too much revolving credit can affect your credit score. It's best to keep balances low, and pay off your debts as quickly as you can.
The credit mix is a second factor which affects your score. It represents the various types of debt you hold. A healthy balance of installment debts like a car loan or mortgage and revolving loans like credit cards is the goal.
You can improve the mix of your credit by applying for new revolving debt, like a card. However, it is not necessary to apply for everything at once. This could send the incorrect message to lenders, that you are in financial difficulty.
Your credit score is also affected by the length of your history of credit and the age your accounts. If you are financing a brand new car, the average age of each account may drop slightly. This could have an adverse impact on your length related scoring factors.
The amount owed variable can also affect your credit score negatively. It accounts for 30%. Addition of a new installment credit to your report will increase the amount you owe.
Many people pay off auto loans early. You should consider how early repayment of your car loan can affect your score before you do it.
Keep your auto loan open and make timely payments. This will positively impact your credit score's length-related factors. These account for 15% of the total. If you close an automobile loan, the average age of your account will decrease because it is no more considered active.
A new car loan will have a positive effect on your credit rating as it allows you to establish a good credit history. Keep in mind, however, that a new auto-loan can have a long time to improve your credit score.