{"id":19962,"date":"2023-10-03T15:13:00","date_gmt":"2023-10-03T21:13:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=19962"},"modified":"2025-06-06T10:47:12","modified_gmt":"2025-06-06T16:47:12","slug":"does-a-car-loan-build-credit","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/loans\/does-a-car-loan-build-credit.html","title":{"rendered":"Does a car loan build your credit score?"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.\u00a0<\/em>See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

If you have a car loan, making your payments on time and in full each month should help build your credit over time.<\/p>\n\n\n\n

Having good credit can save you a significant amount of money in interest fees on a car loan. Ideally, you\u2019ll want a credit score of 660 or higher to get a favorable interest rate<\/a>, but did you know that having a car loan may also help improve your credit?<\/p>\n\n\n\n

We\u2019re going to explain how car loans can affect your credit report and how they may be able to help raise your credit. You\u2019ll also learn how to find the best car loans to help you save money on your new vehicle.<\/p>\n\n\n\n

Is a car loan good for your credit?<\/h2>\n\n\n\n

Applying for a car loan can hurt your credit temporarily, but your credit can recover and even improve in time. When you apply for a car loan, the lender needs to run a hard inquiry<\/a> to check your credit history, which is what can lower your score. The decrease can also happen if you refinance your car, but in both cases, the impact is usually minimal.<\/p>\n\n\n\n

The good news is that a car loan can help you boost your credit in the long term. One of the primary factors that determines your credit score is your payment history. If you take out a car loan and make your monthly payments on time, these payments are reported to the major credit bureaus. If you\u2019re wondering how fast a car loan will raise your credit, the answer is that it can take a few months to start seeing results.<\/p>\n\n\n\n

One way to ensure you make your monthly payments on time is to set up automatic payments. After months of making these on-time payments, the consistent positive payments should far outweigh the temporary decrease from the hard inquiry.<\/p>\n\n\n\n

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How auto loans affect your credit report<\/h2>\n\n\n\n

Your credit report has a lot of data, and it can seem a bit overwhelming. Before going over how auto loans affect your credit report<\/a>, it\u2019s helpful to know the five factors affecting your credit score<\/a>.<\/p>\n\n\n\n

Each factor is weighted differently, so they\u2019ll have a different level of impact on your credit. The following percentages are based on the FICO\u00ae scoring model, which is the most commonly used model.<\/p>\n\n\n\n

Payment history (35 percent)<\/h3>\n\n\n\n

Your payment history is the most heavily weighted factor of your credit score at 35 percent. Late and missed payments can result in derogatory marks<\/a>, which have a negative impact on your credit. On the other hand, when you make your car payments on time, the credit bureaus report them, which can help your credit.<\/p>\n\n\n\n

Credit utilization (30 percent)<\/h3>\n\n\n\n

Credit utilization is how much you owe compared to your overall credit limit. Your utilization is often in the form of a percentage or a ratio. Ideally, you want to keep your credit utilization under 30 percent. For example, if you have a $1,000 credit limit and only owe $200, that\u2019s a 20 percent utilization rate. Your car loan won\u2019t affect your credit utilization.<\/p>\n\n\n\n

Credit age (15 percent)<\/h3>\n\n\n\n

Your credit report also shows the length of your credit history, and this helps lenders see how much experience you have with credit. When you acquire an auto loan, you\u2019re typically paying off the vehicle for years, and this is factored into the average age of all of your credit accounts. By having a long history of making your payments on time, it can help your credit.<\/p>\n\n\n\n

New credit (10 percent)<\/h3>\n\n\n\n

Earlier, we mentioned that the application process can temporarily lower your credit due to hard inquiries. If someone is regularly applying for new lines of credit, it may be a red flag to lenders. But remember, financing a car can also help you build your credit over time, eventually outweighing the negative impact of the hard credit check.<\/p>\n\n\n\n

Credit mix (10 percent)<\/h3>\n\n\n\n

The two primary types of credit are installment credit and revolving credit<\/a>. Credit cards are considered revolving credit because when you make your payments, you can access that money again. With a line of installment credit, you owe a set amount each pay cycle, and car loans fall into this category. When you have a variety of types of credit, it helps improve your credit mix.<\/p>\n\n\n\n

On your credit report, you will find two categories that will provide information about your car loan:<\/p>\n\n\n\n