toy car on top of calculator

Does getting a car loan damage my credit score?

Have you ever fallen behind on more than a few payments? If you fail to pay certain bills on time, like your phone bill, student loan, or credit card, your credit score is liable to get hit after a few months. If you mismanage your money more effectively, you could be looking at repossession and a huge hit to your credit report.

Once you've gotten yourself back into a position where you can begin to repay your debts on time and at more frequent intervals—maybe you’ve paid a lot of debt off already—it’s time to start deciding how you’re going to approach credit repair.

If you're thinking about repairing your credit score and getting your report back into good standing, would a car loan help or obstruct your goal?

Car loans and credit scores

You may think that taking out another, rather large loan would go against your credit score because you will owe even more money. But in fact, borrowing for a car loan actually improves your score substantially in a short period of time.

There are two categories that are used to calculate your credit score. First comes your credit history, which takes into account your open and closed accounts, plus all of your late payments. Next is your credit diversity, which looks at what types of debt you’re carrying.

If you have a poor credit score, car loans are relatively easier to attain than new lines of credit, and they can improve both categories mentioned above: credit history and credit diversity. Make sure you’re only authorizing credit checks for auto loans; too many inquiries from differing lenders (like credit card or short-term loans) will seriously damage your score in a hurry because it looks like you’re trying to get any sort of loan for any amount of money. Creditors need to see the purpose behind your financial actions.

Once you’ve secured this new car loan, you need to be positive that you’re going to make every payment on time. Paying all your bills on time is another way to improve your credit history, especially when you have new loans on your report.

Remember that there will be new associated costs accompanying this new vehicle purchase, and car ownership in general. To keep maintenance and gas costs low, you could keep your car use to a minimum until you pay off the majority of the debt on the vehicle. By that time, your credit score will be back in good standing and you’ll be able to take that set of wheels for the road trip of your dreams.