Vehicle Financing and Leasing Impacts Credit
Assuming you’re financing or leasing a vehicle, your credit will be substantially impacted. Both car loans and car leases are reported to credit bureaus, and both have substantial impacts because of how much vehicles cost.
The only way to purchase a vehicle without affecting credit is to pay cash, which only a few well-off people can afford to do. Just because your credit will be impacted doesn’t mean that it’s to your disadvantage, though.
Short-Term and Long-Term Impacts
To understand how your credit score will be impacted by a car loan (or lease), it’s helpful to be familiar with the five categories that your credit score is based on. Your credit score is comprised of the following:
In the short term, taking on a new car loan will negatively impact your credit score. You’ll have a ding in the new credit category, and there’s no way to avoid this. Even people will pristine credit will notice a few-point drop immediately after they sign a car loan.
Any negative impact is short-lived, however. New credit only accounts for 10% of your credit score, and your car loan won’t be considered as new credit after a little while.
In the medium and long term, a new car loan can positively impact your credit score in multiple ways. Your payment history will improve as you make on-time monthly payments, and this is the largest category considered (more than 3 times greater than new credit). You’ll also improve your credit mix by adding another type of loan. If you’re a new driver, you’ll start to lengthen your credit history as well.
These positive impacts are more important than the temporary ding against your new credit. Pay your loan on time, and your credit score will soon increase far beyond where it was when your first signed.
(Credit utilization is unaffected, as it only includes revolving accounts such as credit cards.)
Tips for Maximizing Your Loan’s Positive Effects
Because your credit score is most affected by on-time payments, make sure you can afford the loan payments. To this end, you might:
Get a Car Loan With No Credit
If your credit needs substantial improvement, bad credit doesn’t have to prevent you from purchasing a vehicle. At Fast Start Auto, we have many affordable used cars for sale with no credit check required. We’ll get you set up with a good vehicle and affordable loan, so you can start rebuilding your credit while driving a new car.