Since an auto loan can affect your credit score for as many as five years, it isn't something you should take lightly. Buying a car can improve your credit or harm it, depending on how well you manage your finances. In some cases, though, it may not affect your credit at all.
Building Credit
The length of your credit history accounts for 15 percent of your credit score, according to CBS' "The Early Show." While this makes it only the third most deciding factor in your score, it's still important to lenders. If you have no credit or a short credit history, taking out an auto loan can help you build credit. Regardless of the length of your credit history, the loan impacts your score in other ways.
Credit Inquiries
Lenders inquire about your credit history when you apply for auto loans, and each of these inquiries lowers your credit score, although usually by fewer than five points. As long as you get a loan within two weeks of beginning your search, all inquiries appear as a single inquiry on your report. The damage to your score will be minimal.
Making Payments
Your payment history is the most important factor in how much your auto loan affects your credit, accounting for 35 percent of your score. Lenders typically report payments that are 30 or more days late, so pay early if necessary to ensure you make payments on time.
Paying in Cash
Depending on your financial situation, it may not be necessary to take out a loan to buy a car. This is especially true if you buy a used vehicle, which can cost less than $5,000. Paying for a car in cash does not affect your credit score, so it isn't the best option if you intend to apply for credit in the future.
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