Whether buying a car affects your credit score or not depends on how you pay for it. If you pay cash, purchasing a car will have no effect on your credit score because your credit score does is not affected by a cash purchase. Alternatively, paying with a credit card may have a short term effect on your score. Though a smaller purchase than a house, many people take out a car loan to help pay the costs at the time of purchase. This loan can affect your credit score in a number of ways.
Auto Loan Inquiries
When taking out a car loan, shop around for the best loan terms. Each time you apply for a loan, the loan company will pull your credit score resulting in an inquiry on your report. However, if you apply within a short period of time, your credit score will count all the lender inquiries as one for the purpose of your credit score.
Payment History
An auto loan is one more opportunity for you to show that you are a creditworthy borrower. Your payment history makes up 35 percent of your credit score, so making timely payments on your car loan will boost profile as someone who pays their debts. However, if you miss payments, your score will suffer.
Amounts Owed
When you take out an auto loan, it will be recorded as an additional debt. The amount of money that you owe makes up 30 percent of your credit score. Depending on how large the loan is, your credit score may drop simply because you owe more money after buying the car than you did before.
Types of Credit Used
At least ten percent of your credit score is based on the different types of credit you have used. If you have not had an auto loan before, as long as you make timely payments, your score can improve because you have diversified the types of credit on your report. Lenders look more favorably on people who have used multiple types of credit, because they view them as more educated borrowers.
Paying With a Credit Card
If you use your credit card to pay for a car, the balance owed will increase. This will increase your balance to credit limit ratio, which can reduce your score because you are using more of your available credit. If you pay your credit card off while paying on the loan, buying the car can improve your credit score because you have showed you can manage credit by making your credit card payment on time. However, if you make late payments or default on your balance, your credit score will suffer.
0 comments:
Post a Comment