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In most cases, it takes a few months for a car loan to raise your credit score. That is assuming that you make your payments on time.
A car loan, like any other form of credit, is going to have an impact on your credit score. The majority of these changes are going to positively impact your score.
Your Score Will Drop Temporarily After You Apply
Applying for a car loan will trigger a hard inquiry. Hard inquiries occur whenever a lender checks your credit to determine whether or not to offer you a loan.
Unlike soft inquiries or soft pulls, hard inquiries may lower your credit score after the inquiry takes place. The good news? Your score will typically only drop a couple of points. Then, it will recover fairly quickly.
Hard inquiries are a part of applying for any new line of credit. But don’t worry, they’re not going to decimate your score in a matter of moments.
You Add a New Loan to Your Credit History, Which Boosts Your Score
Adding a new loan to your credit report can be a great way to build credit. It adds a new item to your credit history and it helps you develop further evidence that you’re a responsible borrower.
However, these benefits only apply if you keep up with your monthly payments. Delinquency can cause your score to drop significantly. This will hurt your score, ruin your credit history, and make it difficult to get a loan in the future.
Be diligent about paying back your loan on time so you can avoid these consequences.
A New Account Shows Up on Your Credit Report
A new account can be problematic on some credit reports. This happens for two reasons.
- Adding a new account to your report can lower your overall age of credit. This can raise red flags for lenders.
- If you’re opening up several new accounts at once, this new credit account can also make you seem riskier.
That being said, it all depends on your unique situation. If you’re someone who has worked on their credit for years responsibly, the impact may be minimal.
Additionally, a new account might not drag your score down by much regardless. Keep these factors in mind when shopping for a new car loan.
It Adds a New Account to Your Credit Mix
Your credit mix is another very minor section of your FICO credit score (10%). However, adding new loans could be an asset to your credit score.
With a new auto loan, you’re diversifying your overall credit mix. Should you, for example, pursue a mortgage, other lenders will look for this in your report. A healthy credit mix shows that you can manage multiple kinds of debt.
Even though diversification isn’t your primary objective, it can be an added benefit.
How Much Time Does It Take for Car Payments to Improve Credit?
Just because you have a new loan and are paying it off each month doesn’t mean your score is going to soar immediately. You can’t usually increase credit score overnight.
There are numerous factors that will determine how long it will take to boost your score. However, there is some data we can go by to see how long it might take to fix certain mistakes. Here’s some data offered by Bankrate.
Credit Timeline Repair Events
|Credit Event||Average Time to Repair Credit|
|Bankruptcy||6 Years or More|
|Home Foreclosure||3 Years|
|Missed/Defaulted Payment||18 Months|
|Late Mortgage Payment (30 to 90 days)||9 Months|
|Closing Credit Card Account||3 Months|
|Maxed Credit Card Account||3 Months|
|Applying for a New Credit Card||3 Months|
The fewer mistakes you have, the easier it will be to raise your score. Focus on developing good credit habits so that you don’t slip up and push your progress back.
How Long Does It Take a Car Loan to Show Up on Your Credit Report?
While it can take years to heal your credit, it takes significantly less time for your loan to show up. A car loan will typically appear on your credit report within 30 to 60 days.
If your car loan is not showing up in that timeframe, there may be a few reasons behind it.
- You’re working with a lender that doesn’t report credit activity to the three major bureaus. This is something you need to verify beforehand. Otherwise, your loan isn’t going to be an asset to your credit.
- Your lender simply hasn’t reported any activity yet. This can happen sometimes, and it’s generally nothing to worry about. However, there are some cases where it’s important to reach out to your lender immediately. We’ll take a look at this next.
- An issue occurred when a lender tried to report your activity to credit bureaus. Sometimes, this might be due to your information being reported incorrectly. Other times, there might be an issue with the lender’s system.
Check credit scores regularly to see if they’ve been updated. If you’ve noticed your loan isn’t showing up in your report, check in with your lender. This will help you get your activity up there faster so you can begin raising your score.
Things That Influence Your Credit Score
Knowing what plays a role in your credit score can help you boost it more effectively. It may also help you identify problem areas currently bringing your score down. Here’s a breakdown of your FICO credit score.
- Payment History (35%): Your payment history makes up the biggest chunk of your credit score calculation. Paying your car loan on time will help you develop a solid payment history that will raise your score.
- Amounts Owed (30%): Keeping your overall credit utilization below 30% is critical, although below 10% is best. Make sure you’re not maxing out cards as this can put you into even more debt. It can also make it hard to pay for other lines of credit like your new auto loan.
- Length of Credit History (15%): A longer credit history is more desirable to lenders. It demonstrates that you’ve been opening credit accounts and managing them for years. Those with limited credit history will find it harder to convince lenders to give them a loan.
- Credit Mix (10%): A healthy credit mix isn’t necessary for a good credit score. However, it can serve to boost it. If you have an auto loan, credit cards, mortgages, and beyond, you have a good mix.
- New Credit (10%): As we stated above, new credit can affect your score. This is especially true for those with limited credit opening up a ton of accounts at a time. This is seen as risky given you have limited history and no indicators as to whether or not you’ll pay it back. If you don’t, you can end up hurting your score and bringing it lower than it is currently.
Understanding how to raise your credit begins with understanding the anatomy of a credit score. All of the categories above play a role in how well your score performs. Aim to follow the best practices of each so that you can reach your goal quickly and more effectively.
A car loan can raise your score in a matter of months. But it depends entirely on why your credit is low. Did you accidentally miss a credit card payment? If so, it may take three months to see a change.
If you’re taking on an auto loan and want to see how it will impact your credit, use the guide above as a starting point!
Dylan Buckley is a freelance finance writer and editor with 7 years of professional experience. Specializing in personal finance, cryptocurrency investments, and Fintech, Dylan is deeply passionate about creating content that helps readers make informed, confident financial decisions. He studied finance in college and maintains a credit score over 780.