Does a Car Loan Build Credit? How Many Points Will it Raise My Credit Score?

Ben Allen  | 

Building your credit should be a long term personal goal. By having a high credit score, you can get lower interest rates on loans, higher limits on credit cards, and more likely to get accepted into the apartment you want. Credit plays a big part in most people’s day-to-day life.

A good way to build your credit is to get a loan and pay it off. Put that hand-in-hand with the fact that most people can’t afford to purchase a car in cash upfront, and you have a plan. Buy a car using a loan so you can get around and build your credit at the same time.

Does a Car Loan Build Credit?

Having a loan itself doesn’t help your credit. In fact, initially, the loan will actually lower your credit score a little bit. That’s because you’ve taken on extra debt, which does show up in a credit report. Until you start paying off the loan, that extra debt will lower your credit score. That’s why it’s not a great idea to take out multiple loans at the same time, because each time your credit score will likely drop.

What will build your credit is regularly making payments on your car loan. Each time you make a payment, your lender should be reporting back to credit bureaus. That, in turn, goes on your credit report as positive activity, raising your score. Keep it up long enough, and your credit score will most likely be in a positive range.

How Many Points will a Car Loan Raise My Credit?

There isn’t a firm answer to this because every loan and situation is different. Your FICO credit score is determined by several different factors, including your payment history, how much debt you have, how long you’ve had and used credit, and more.

The area that’s considered the most important though is your payment history. If you make payments on time, your credit score will grow.

It’s hard to say though by how many points your credit will raise. If you already have a credit score in the 800s and you make payments on a car loan, it won’t go much higher because the highest you can go is 850. But if you have a low credit score, like in the 400s, making regular and on time payments can, over the long term, raise your credit score quite a bit.

You also need to consider what else is listed on your credit report. If you make an on-time and in full payment on your car loan, but then fail to pay your rent, you’ll likely go down on your credit report. Negative items will lower your credit score more than a positive item will raise it. If you have a long stream of negative items, including missed or late payments, bills going to collections, and declaring bankruptcy, paying off a car loan on time won’t do much for a very long time.

Does Paying Car Insurance Improve My Credit?

Like many normal monthly bills, paying for your car insurance does not improve your credit. You aren’t exercising any kind of credit or loan, so they have no reason to report it to credit bureaus. If you fail to pay your car insurance bill though, that bill can be listed as a “missed” or “late payment” to the credit bureaus, hurting your credit. Let it go long enough, it might even go to collections, further damaging your credit.

However, there is a way to use paying off your car insurance to your benefit; charge it to your credit card. This way, it does get credit involved, and then by paying off your credit car on time, that positive action is reported to credit bureaus. Just make sure that you can pay off your credit card in full and on time, or you risk hurting your credit.

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How Will a Car Loan Affect My Credit?

Having a car loan can impact your credit in a variety of ways, both good and bad. It’s a risk to take out such a large loan when the future isn’t always clear. If you end up losing your job and can’t pay for the loan, you’ll hurt your credit. But if everything works out and you can pay off the loan in full (and all on time), it can be a major boost.

Taking Out a Car Loan

The initial act of taking out a car loan will slightly decrease your credit score. That’s because you are taking on extra debt, and one factor in a FICO credit score is how much debt you have. But don’t worry, once you start making payments, your score will bump right back up.

Making Payments on Your Car Loan

This is the bread and butter of building your credit. If you make all of your payments on time and in full, your credit score will rise. The most reliable ways to grow your credit is by doing this with every loan and credit card you have.

Missing a Payment on a Car Loan

This is the most common negative item on people’s credit reports. Whether you forgot about the payment or just didn’t have the money for it, missing a payment will hurt your credit.

Every single time you miss a payment, the delinquency will get sent to a credit bureau. Even if you later make up the payment, it will stay on your credit report as a missed payment. That missed payment will stay there until 7 years, where it will naturally drop off the report.

If you missed your payment by a single day or so, don’t panic. Most lenders wait around 30 days before reporting a missed payment to the credit bureaus, so as long as you reach out to them, tell them the payment is coming, and then actually pay it, you should be good. You might have to pay a late fee, though.

Refinancing a Car

Refinancing a car won’t really impact your credit score as long as you keep up with your monthly payments. When the actual refinancing happens, your old loan is closed out and paid and the new loan is immediately added to your credit report at the same time, so you come out even. But, if by refinancing you are more likely meet your monthly payments, it’s a smart credit decision in the long run.

Paying Off a Car Loan

The initial act of paying off your car loan early or on time will likely raise your credit score, because the car debt is no longer on your report. But know that without continuing to make regular payments, that your score won’t continue to grow. If you have no other payments, including credit cards or other loans, your credit score will stay stagnant. Once you pay off your car loan, make sure there is some activity, such as regularly using and paying off credit cards.

Becoming Delinquent on Your Car Loan

Miss enough payments long enough and the lender of the loan will take extra steps to get their money back. These steps all negatively impact your credit score heavily. This can include sending your debt to collections, constant calls to your home and cell phones, and constant negative marks on your credit score for missed payments.

Having a Car Repossessed

If you go too long without making a payment, the lender is allowed to repossess your car as long as it doesn’t “disturb the peace.” Your car is used as collateral in the loan, meaning that once you stopped paying it off, it becomes the property of the lender. Repossession is a huge negative mark on your credit score, with only declaring bankruptcy hurting your credit more. But if you’ve reached the point of repossession, it’s likely your credit score is already wrecked pretty badly.

Pay Off Your Loan, Build Credit

Before you take on the extra debt of a car loan, make sure you have the money available to pay for it. Account for other current debts and bills, including student loans, rent, cell phone bills, groceries, and more. Don’t just assume you have money because you got pre-approved for the loan; check your finances and make sure you have the money available. Then, make your payments in full on time, and build your credit!


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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.

This post was updated July 31, 2018. It was originally published May 2, 2018.