Car shoppers with compromised credit are often advised to put their car purchases on hold until they repair their credit score. While this can be a smart move in order to avoid high interest rates and the risks of taking on more debt, sometimes a car purchase can't be delayed. The good news is that moving forward with buying a vehicle can even help boost your credit score if done right. Although it's not a quick credit fix, paying off a car loan will help raise your score over time. In order to achieve the desired outcome, it's important to carefully select the best auto financing and pay off the loan on time. Learn how each step of the process will impact your credit and how to maximize the benefits to your score.

Planning for the Car Purchase

car loan application form

The impact of a car purchase on a shopper's credit score usually takes effect well before they make the first payment. Since most buyers aren't paying for a car in cash, they must first apply for an auto loan. A car loan application is considered a hard inquiry which can take a few points off a credit rating.

We often hear from concerned car shoppers that think applying for multiple auto loans can significantly hurt their credit scores. The reality is that if they apply for the loans within a short timeframe, the inquiries will only count as one. For example, all FICO score inquiries made within 30 days are grouped together. This means you should shop around for car loan offers, but keep your applications to a short timeframe to minimize the impact on your credit.

Tips for Planning your Car Purchase:

  • Choose an affordable vehicle and make sure the monthly payments fall well within your budget.
  • Select the shortest loan terms that offer a comfortable monthly payment.
  • Get pre-approved for an auto loan from multiple lenders and select the best interest rate.
  • Consider where you buy. A traditional lender will report your auto loan activity to the credit bureaus while buy-here-pay-here dealerships finance the vehicles themselves and oftentimes do not report your activity. Although this can work in your favor if you miss a payment, it won't help you build your credit score.

Obtaining the Auto Loan

car loan issued

Auto loans are typically classified as installment accounts that fall into the same category as student loans and mortgages. If you have not previously had an installment account in your credit portfolio, obtaining an auto loan can help boost your credit by adding to your credit mix. Remember that this is contingent on you making on-time payments every month. Even if you've previously checked the installment loan box, keeping up with your car payments will improve your credit score. 

Car shoppers with compromised credit and those with no credit may find it difficult to get approved for an auto loan on their own. If you find yourself in this situation, a cosigner can help with obtaining the financing you need. You'll still be the primary borrower on the account but enlisting a cosigner with good credit gives lenders a backup if you miss a payment.

Tips for Securing Auto Financing:

  • Shoppers with compromised credit should consider applying for auto financing at credit unions, local banks, and online lenders.
  • Select the best financing rates and loan term to balance comfortable monthly payments with the overall cost of the auto loan.
  • If you're having trouble getting approved for an auto loan, a cosigner can give lenders the confidence they're looking for.

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Paying Off Your Auto Loan

Young driver paying off auto loan
Paying off an auto loan helps first-time car owners build up their credit. 

The most important part of using a car loan to boost your credit score is staying on top of making your payments on time, consistently. This will help car owners with rocky credit histories as well as younger owners who have not yet built up a credit history. By paying your car loan on time or early every month, you'll see your score climb steadily over the course of your loan term.

Conversely, missing payments will have the opposite (less desirable) effect. Although one missed or late payment may not seem like a big deal, it will negatively impact your credit score if your lender reports it to the credit bureaus. According to Equifax, a 30-day late payment can result in a drop of up to 110 points on a FICO score of 780. This can drop a borrower from a "Very Good" credit category to "Fair" reinforcing the importance of paying on time. 

Tips for Paying off Your Auto Loan:

  • Make your car payment on time or early, and set up auto payment so you never forget
  • If you find yourself in a situation where you can't make your car payment, be proactive by calling your auto lender right away. In some cases, lenders are willing to make accommodations.
  • Communication reduces the chance that the missed payment will be reported to the credit bureaus. 

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