Does Getting an Auto Loan Raise Your Credit?

Paying your bills on time, disputing negative or inaccurate information on your credit report and keeping your account balances low -- all these ideas can potentially raise your credit score. Simply getting an auto loan won't raise your credit score; in fact, it may lower it slightly at first since it will be a new account on your credit report. The way in which you approach the auto loan process, however, and your overall management of the loan are what counts.

Before the Auto Loan

Banks and financial institutions that make auto loans do so on the basis of your creditworthiness. In other words, they look at your credit history and score to decide whether or not to approve you for a car loan. Some of the issues that the bank looks at include your repayment history, whether you have charged-off accounts or any accounts in collection or with past due statuses. Once the bank decides to extend an auto loan to you, your credit score often determines the interest rate you'll pay. It's often wiser to clean up or improve your credit history before you seek an auto loan.

Applying for an Auto Loan

A common practice when buying an automobile is to find the car you want and then apply to your bank or different lenders to determine who will make the auto loan for the amount you need. If your goal is to raise your credit score, you must be able to afford the monthly auto loan payment. It's more beneficial to apply for an auto loan before you go car shopping. The bank can tell you the maximum line of credit for which it will approve you and the interest rate for the loan. The bank may even be able to figure your maximum monthly payment. Once you have these preliminary details, you can find a vehicle with a price that matches your auto loan budget.

Raising Your Credit Score

To raise your credit score with your auto loan, you must make the loan payment on time each month and let the bank know as soon as you see any impending financial troubles. For example, the bank may be able to grant you a forbearance for a short one-to-two month period to prevent missed payments and past due balances. Also, if you do happen to get stuck paying a higher-than-average interest rate, you may be able to refinance your auto loan with a lower rate after a year or two of building a satisfactory repayment history with the current lender.

Effects on Credit

Assuming you handle your auto loan responsibly, creditors and lenders may be more apt to extend you credit in the future. For example, if you've only ever used revolving credit (i.e. credit cards), having an installment loan -- the auto loan -- on your credit report shows lenders that you can be responsible with both types of accounts. This diversity of credit lines also accounts for about 10 percent of your FICO score. Even though your account is technically closed after you successfully pay off your auto loan, it remains as a positive mark on your credit report and may boost your score.