Does a Car Loan Raise a Credit Score?

Car loans and other credit accounts are part of your financial history. They get added to your credit reports by TransUnion, Equifax and Experian. These three credit bureaus provide the information to lenders who evaluate your future applications, and it is also used to calculate your credit score. Vehicle loans can raise the score if you handle them appropriately.

Definition

Your credit score is a three-digit number calculated by FICO, which is the original scoring firm, and the credit bureaus. The score is based on many factors. FICO explains that it considers things like your current loans, including the original balances, amounts owed and whether you make your payments on time. Paid-off accounts have an influence, too, although past car loans do not have as much impact as recent ones. A high FICO score helps you get approved for credit more easily and qualifies you for better interest rates.

Effects

A car loan raises your credit score when you make your payments on time. FICO advises that your overall payment history on all your accounts, along with any related charge-offs, collection actions and court judgments, makes up more than a third of your score. You help your score even more if you do not open other unnecessary accounts while paying off your vehicle. FICO penalizes you if your debt load is too high.

Considerations

Vehicle loans are especially beneficial to borrowers who are establishing a credit history for the first time. Lenders are leery about extending credit when you do not have much of a history. You can get a secured credit card if you give the bank a deposit for collateral, but MSN Money financial writer Liz Pulliam Weston explains that you need a mixture of account types to properly establish yourself. Credit cards are revolving accounts, while car loans are installment accounts, so your score goes higher when you have both and manage them properly.

Challenges

You will have trouble getting a car loan if your credit score is bad or you have other challenges like low income or a short employment history. You can qualify if you find a co-signer who has a high score and use the account to build up your own credit records. The co-signer is equally responsible for repayment, according to Pat Curry of the Bankrate money management website, so you damage that person's credit score along with your own if you stop paying for the car.

Warning

Car loan contracts usually allow the lender to seize the auto if you skip even one payment. This hurts your credit score, and the repossession stays on your credit reports for seven years. Even if your car is not repossessed, a string of delinquent payments destroys any progress you made previously in raising your credit score with the loan.