Any time you buy something on credit; it has the potential to impact your credit score. Buying a car is no exception. However, credit purchases can also positively affect your credit score. Since a credit score is a reflection of your overall credit behavior at one particular moment, buying a new vehicle will only reflect one fraction of your total credit score.
Credit Scores Credit scores are a complex combination of a number of different factors. The most important contributor is usually your payment history. The amounts of debt you have and the amount of available credit you use, also play significant roles. The different types of credit you have, along with the amount of new credit, play lesser-yet-important roles in determining your score.
Monitoring your credit regularly can help you understand where you stand in the credit landscape, since stronger scores typically lead to better credit offers and lower interest rates. Understand that there are many different credit scores that all take into account different factors and are used to determine your credit worthiness for several different types of loans ranging from mortgages and auto financing, to school loans and small business financing.
New Vehicle Purchases If you plan on financing or leasing, you’ll have to apply for credit. Whether you finance through a dealership or through an outside third party, such as a bank, your credit score will play a large role in the interest rate you’ll have to pay. Since some credit inquiries impact your credit score, just applying for a vehicle loan, whether or not you ever take one out, can impact your score. The amount of your loan may also count against you, as credit-scoring models factor in the size of your outstanding debt as part of your debt-to-income ratio.
Effect of Other Credit If your credit habits are already in shambles, adding a new vehicle loan may indeed impact your score even further, particularly if it’s sizable. An important part of your credit score is your credit utilization, or the amount of available credit you’re using. It’s important to always be mindful of how obtaining new credit will affect your credit utilization, which could potentially put you in a higher risk category.
Effect of Time There’s an old expression that “time heals all wounds,” and the same can be said for your credit score. Even if your new vehicle purchase influences your score, the effect of that hit will decrease over time. Your new credit inquiry, for example, will drop completely off your credit report after two years. The longer you make successful, timely payments on your loan, the better your payment history will look on your report. As you reduce the outstanding amount you owe, your score could increase, all other things being equal. Having an installment loan — your new vehicle purchase — on your credit score can also help improve your credit mix and may positively affect your score over time as well.
About the Author
John Csiszar began writing in 1989 at the ERIC Clearinghouse for Junior Colleges. His work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.