How Much Will Buying a Car Boost My Credit?

There's no one answer as to how buying a car will benefit -- or hurt -- your credit. Loans and credit purchases don't exist in a vacuum. The effect of any one transaction will depend on your credit history at the time. Generally, taking out an auto loan can cause a short-term credit-score drop but in many cases will eventually be an asset on your credit report.

Initial Effect

Shopping around for a car and a lender may lead to multiple companies pulling your credit report. Each credit inquiry can lower your score, but if you complete your shopping within a 30-day period, the credit bureaus will treat the multiple inquiries as if they'd received a single request for your file. Opening a new credit account often causes an initial drop in your score, but that should fade within a few months if you keep up payments.

Credit Types

If all of your debt is on credit cards, adding a car loan to your credit mix can be a plus. Credit cards are revolving credit, meaning that when you pay off the balance, you renew your ability to borrow. Car loans are installment loans; paying the loan off means it's gone. The Fair Isaac credit-scoring company says about 10 percent of your score is based on whether you have a variety of loan types, rather than just credit cards.

Payments

Payment history contributes 35 percent of your FICO score. If you take out an auto loan and make your payments on time for the life of the loan, that will benefit your credit score. If, on the other hand, you pay late every month or you miss a payment or two, that's a big negative. It's not a permanent negative, however. If you miss one payment the first year of the loan and never again, the effect of the black mark will diminish with time.

Considerations

The impact of your loan or any other credit transaction will vary according to your previous credit history. If you already have a good score and a history of timely payments, one more loan may not boost it much. If you're young, with little credit history, buying a car and paying off the loan will count for a lot more. The negative effects of taking out a loan may hurt someone who's maxed out his credit cards more than someone who carries a low or zero balance.