In our congested towns and cities, having a car is not only convenient but is also seen as a status symbol as well. Also, even though you may dislike using a car every day for commuting, owning a car feels like a necessity given the state of public transportation, particularly the last-mile connectivity concerns. Like any other expensive item, a car is typically purchased through a loan from a bank or other financial organization. Your credit score also comes into play when a vehicle loan or credit issue emerges. You must be aware that getting authorized for credit of any kind requires having a credit score, and a good one at that.

For those who are unsure, a credit score is a number.

Your creditworthiness is defined by your credit score, which is calculated using several aspects of your credit activity. It goes from 300 to 900, with higher scores signifying greater creditworthiness.

How Can A Car Loan Affect Your Credit Score?

Availing of a vehicle loan can affect your credit score in both positive and negative ways, depending on how you handle the loan. Here are some of the ways in which taking out a car loan can affect your credit score:

1. Credit Inquiries: When you apply for a vehicle loan, the lender will typically run a credit check, which results in a “hard inquiry” on your credit report. This can temporarily lower your credit score by a few points.
2. Payment history: Making your vehicle loan payments on time and in full each month can have a positive impact on your credit score. Late or missed payments, on the other hand, can harm your credit score.
3. Credit utilization: Your credit utilization, or the amount of available credit you’re using, is an important factor in determining your credit score. Taking out a car loan can increase your overall debt and potentially increase your credit utilization, which can negatively impact your credit score.
4. Credit mix: Having a mix of different types of credit, such as a car loan and a credit card, can be beneficial to your credit score. This shows lenders that you can handle different types of debt responsibly.
5. Loan duration: The length of your vehicle loan can also affect your credit score. A longer loan term may result in a lower monthly payment, but it can also mean paying more vehicle loan interest rate over time. It can also impact your credit score positively as it shows a long history of timely payments.

Conclusion

In summary, taking out a car loan can impact your credit score in different ways, and the effect depends on various factors such as payment history, credit utilization, loan duration, and more. It’s important to make timely payments and manage your debt responsibly to maintain a good credit score.