Will a car loan hurt my credit?

The convenience of a vehicle is hard to pass up, even if you live in a big city with a great transit system. There are times when you need to do a big shopping haul, move to a new neighbourhood, or visit family out of town.

A car can cost a hefty sum of money that not everyone has stashed away in savings, which is where a car loan comes in. Average prices for brand-new cars increase by 2.7% each year, and most need help to finance their big purchase.

Whether you have outstanding credit or a report that needs a little love, you might have some questions about how a car loan will impact your credit score.

In this post, we’ll show you how your credit score reacts to a car loan so you know what to expect.

How car loans impact credit

Taking out a car loan has the ability to lower, increase or have no effect on your credit score.

What a car loan will do is lower your debt-to-credit utilization, which will increase your credit score until you start making your first payments on the vehicle. The surplus of credit will diminish once you start using it to pay for vehicle.

Once you start making payments on your car, your debt-to-credit utilization will increase, negatively impacting your credit score. Once you start repaying the debt to at least 30% of its original value, your credit score will begin to rebound.

Further, your car loan will get added to any other loans you already have, any other debts, if you’ve maxed out any credit cards and if you’ve had any other hard inquiries on your credit report over the last two years.

Prepare for the credit hit

Financial experts suggest preparing as much as you can ahead of your car loan and purchase.

If you’re in the market for a house and mortgage, don’t get the car until you go through the home purchasing process. Pay off any other debts you may have to decrease your debt-to-credit utilization before you take on the car loan.

When you receive too many credit inquiries in a short time period, your credit score will experience temporary hits that can really add up and push you into lower credit categories.

If you’re looking for a car loan, higher credit scores receive lower interest (APR) rates which can completely change the price you pay for your vehicle over time.

Paying your bills on time will also help you bounce back from any negative hits to your credit score. The faster you pay down your car loan, the faster you reduce your debt-to-credit utilization and the faster your credit score will rebound.