Do Auto Loan Payments Build Credit?

In 2020, the average auto borrower owed $18,500 on their auto loan. A vehicle loan is a convenient way to purchase a car that you can't or don't want to pay for in full. Though an auto loan makes purchasing a vehicle more affordable, it does impact your credit.

What You Need to Know About the Impact of an Auto Loan on Your Credit History

An Auto Loan Will Help You Establish Your Credit

If you have a limited credit history, taking out an auto loan is one option to help build your credit. Your credit score looks at the following factors:

  • Credit Utilization
  • Credit Mix
  • Payment History
  • Age of Credit Accounts
  • Number of New Inquiries

Ideally, your credit report will contain a combination of accounts, like credit cards and installment loans. Your auto loan is an installment loan, meaning you pay the amount that you borrow back over a pre-determined period of time at an established interest rate.

Your payment also remains the same for the life of the loan. If your credit report currently contains a limited number of installment loans, adding one will help you improve your mix of credit accounts.

Once you close on your auto loan, make sure your payments are on time. This will help establish a history of on-time payments. This is one of the biggest components of your credit score and the area that an auto loan can significantly influence. Since an auto loan typically lasts for years, you'll have a lengthy period of on-time payments if you follow the terms of the loan.

How to Minimize Any Short-Term Damage to Your Credit

When you take out an auto loan, the lender will run your credit; this is called a hard inquiry. Having a lot of hard inquiries can hurt your credit score, so if you're shopping around with multiple lenders, complete your loan applications in a short period of time. Multiple hard inquiries that are close together typically count as a single inquiry. The damage caused by a hard inquiry will quickly be offset by the addition of a loan with an on-time payment history.

Ready to apply for your next auto loan? Contact CCCU to get started!