Purchasing a car could help you increase your credit score, and this might be an added bonus if you planned on buying one anyway. However, part of the process of building your credit through an auto loan involves a bit of pain to your credit score. Handle the loan responsibly and it becomes an important positive account on your record.
Financing
Paying cash for the vehicle up front, the cheapest and fastest way to buy the car, does not improve credit one bit. National credit bureaus do not track cash payments. You must finance at least some of the vehicle and go through a lender that reports the account to the bureaus.
Initial Dip
Expect an initial dip in your credit score when you finance a car with a loan. Applying for the loan usually comes with a hard inquiry into your credit history, which costs a few points on your score; new debts added to your credit history probably cause an additional drop. If you already have a bad credit history, the initial drop won't be much because you have few points to lose.
Benefits
Your credit score improves the most when you never miss a payment. Just having the loan on your record, however, could be enough for a significant boost. The account does the most good when it still has a balance. Once you pay off the car, loan the FICO scoring model does not count installment loans in the "mix of credit" category.
Tip
Add a few credit cards to your profile if you do not already have any. While paying off a car loan on time should boost your score, installment debt is not as important to credit scoring as revolving debt. After you pay off your car loan, do not request the bureaus remove it, because you want any old, positive accounts on your record.
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