Buying a car is an important part of life, but it can also have an impact on your credit score. Your decision on whether or not to use a car-loan for your next purchase will depend on a number of factors.
You can improve your FICO score by getting a car. Take out an auto loan to be able to refinance mortgages, other loans and even your home at a low interest rate.
What is the impact of an auto loan on your credit score?
Your credit score is based on many factors, including your payment history and the length of your credit history. A long history of payments and a positive credit score are both important.
Your credit score will consider your credit utilization rate, which is the ratio of your revolving credit to your total credit limit. Your credit score can be affected by having too much revolving or unsecured debt. Paying down your balances and keeping your balances at a minimum will help you to maintain a good credit score.
Your credit mix, or the combination of different credit types you have, is also taken into account by your credit rating. The goal is to have a healthy mix of installment debt, like a mortgage or auto loan, and revolving credit, like credit cards.
It is possible to improve your credit rating by applying for a revolving line of credit such as a credit card. You do not have to apply all at once. If you do this, it could send a wrong message to creditors that you're having financial problems.
Your credit score is also affected by the length of your history of credit and the age your accounts. Financing a new car can cause your average account age to decrease slightly, which can have an adverse effect on your length-related scoring factors.
The amount owed variable can also affect your credit score negatively. It accounts for 30%. Adding a new installment loan to your credit report increases the total amount you owe.
Paying off your auto loan early is a common thing that people do. This can impact your credit rating, so you should think carefully before paying your car loan off early.
Keep your auto loans open by making timely payments. This has a positive influence on the scoring factors related to length, which account for 15 percent of your credit score. 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. You should be aware that it may take some time for your credit score from a new car loan to improve.