When you get any type of new credit, including an auto loan, your FICO credit score will drop. The exact number of points depends on your credit history before the loan. People who have not been managing credit for very long or who have only a couple of credit accounts will see a greater impact than those with a lot of credit history.
Credit Inquiry
Credit inquiries, which occur when a lender checks your credit report in response to a loan application, hurt your credit score. If you did all of your rate shopping within a two-week period, you will have only one inquiry count against you. If you took longer, you could have more than one. Each inquiry generally hurts your score by 5 points or less, but if you do not have much credit history, the impact of inquiries could be greater.
New Credit
About 10 percent of your FICO score is based on the new credit on your report. This includes both credit inquiries and recently opened accounts. When your auto loan account is new, the new account will hurt your credit score. This is because people who have recently opened accounts statistically pose a greater risk to lenders. In addition, because the score looks at the proportion of your accounts that are new, the impact will be greater if you do not have many other accounts.
Amount Owed
A new auto loan could exponentially increase the amount you owe, especially if you do not have many other debts. Because 30 percent of your credit score is based on amounts owed, the debt hurts your credit score. In addition, part of your score looks at the proportion of an installment loan amount that you still owe. Therefore, when you still owe the full amount, this will hurt your score most. As you pay down the loan, your score will increase again.
Length of Credit History
About 15 percent of your FICO score is based on your credit history length. Although a new loan will not shorten your overall credit history, it adds a brand new account that shortens your average account age. For example, if the only thing on your credit report was a card you have had for two years, adding an auto loan cuts your average account age in half to just one year.
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