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How Getting A Car Loan Can Affect Your Credit, And Things You Can Do To Offset The Effect

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If you are looking to invest in a new car and scouting for a good auto loan to aid in the process, it is time you learn how an auto loan can affect your credit score. Now, now, there is nothing to stress about. Just like any other automotive financing, be it a loan or a lease, you can either improve your credit score or ruin it.

There are two things that an automobile loan can affect:

 

 

  • Your Credit Report
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  • Your Credit Score
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    What Is A Credit Report?

    The credit report is a summary of allthe payments you make every month for all accounts. It also includes all the companies that have gone through your credit report and your outstanding settlements.

    What Is A Credit Score?

    A credit score is a three-digit number which reflects how reliable you will be as a borrower. The credit score is calculated from the credit report. If the report reflects timely payments, you will end up with a high credit score.

    Getting a car loan can affect your credit in multiple ways. A car loan might impact your credit badly, or positively and in some situations might not affect it at all.

    • Experts opine that when you take a car loan, the credit utilization goes down which automatically increases the credit score until you start repaying the loan. The credit utilization decreases as you start repaying the loan and will continue falling until you pay off the entire loan amount or when the balance is 30% or lower than the originally borrowed amount.
    • Taking the car loan might decrease the credit score, but experts believe that it would also depend upon the other loans that you have taken. The dip in credit score also depends on whether you have maxed out your credit cards and other inquiries made within a time frame of two years.
    • Upon taking a car loan, you might be refused for other loans and even credit cards until you repay the borrowed amount without defaulting.

    Ways in Which Car Loans Negatively Affect Credit

     

    • Inquiries and Applications: inquiries and applications for auto loans have a detrimental impact on the credit score. The consumer bureaus have you on their radar and start monitoring your financial activities.
    • Late Car Payments: When you are late in repaying your car loan, you mess up your credit score. You have to pay a late fee, and it appears on the consumer report. The credit score of your co-signer is also affected when you are late in repaying.

    You can prepare for the impact that you will face consequently. Here are things that you can do to stop the impact from escalating.

    • Plan Ahead: The importance of credit score is immense, and since it determines a lot of things, it is important to plan things out. When you know that a car loan will affect your credit score, you should not purchase a car until you have repaid a home loan. Pay off all your outstanding loans before you take the car loan. Since the credit score falls after taking the car loan, don’t make any major purchases soon after.
    • Be Punctual With The Repayments: The easiest way to offset the impact on credit score from a car loan would be to repay the loan on time and without any defaults. Making regular payments on time boosts credit scores and the quicker you repay the loan, the faster you reduce the credit utilization thereby again boosting the credit score.

    While these are ways to tackle the negative impact of car loans on credit, there are times when the car loan can help improve your credit score. When you manage your auto loan responsibly, it can build your credit score in the long run. Yes, there will be a dip in the ratings, but it will only last for a short time. The credit score improves because of diversifying the account type and also because you end up repaying the loan on time.

    Ways in Which Car Loans Positively Affect Credit

    • Credit Mix: When a young adult takes an auto loan, they can improve their credit rating because of diversifying the type of account being used. When these customers go for another loan in the future, they fulfill the criterion of having a diverse payment history.
    • Positive Payment History: When you repay your car loan every time without fail, you develop a positive payment history. The auto companies report positive payment histories to the consumer bureaus. This improves your credit score over time, and you have a better chance of getting a loan in the future.

    Ultimately, you are in control of how your car loan affects you, so act accordingly!

    Posted-In: Education Personal Finance General

     

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