Buying a car can be exciting for many reasons. You’re not just increasing your buying power and becoming the proud owner of a new set of wheels—you’re also contributing to your credit file. But how long will it take before you see an improvement in your credit score?
The short answer is that opening a car loan might actually hurt your credit score at first, but the effect will usually turn into a positive one after several months to one year. However, the exact timeline depends on your credit history and how well you manage your loan payments.
Table of Contents
- How do car loans affect your credit score?
- How can car loans build credit (and how long does it take)?
- How car loans can initially hurt your credit score (and later help it)
- How long does it take a car loan to show up on your credit report?
- How long do car loans affect your credit score?
- Is buying a car a good way to build credit?
How do car loans affect your credit score?
Auto loans begin impacting your credit score as soon as they’re first added to your credit report.
Auto financing can hurt or help your credit, depending on how it contributes to the five main factors involved in the calculation of your credit score:
- Payment history: This is a record of your auto loan payments and whether you made them in full and on time.
- Amounts owed: How much you borrowed to buy your car and how much you have left to pay on your auto loan. The more of your loan you have paid off, the better.
- Length of credit history: How long you’ve been using credit and the average age of your credit accounts.
- Credit mix: How varied your credit file is in terms of the types of credit accounts you have.
- New credit: How many applications you’ve submitted recently for new lines of credit, such as credit cards and loans.
We’ll cover how a car loan can affect all of these factors (both positively and negatively), and how this in turn can affect your credit score.
How can car loans build credit (and how long does it take)?
Here are the two main ways that car loans can build your credit, provided that you handle them responsibly:
Adding to your record of on-time payments
The main way that car loans build your credit is by contributing to your payment history. Each time you pay your car loan bill (also known as a car note), the payment will be recorded on your credit report. These payments add up, gradually establishing a good track record that shows lenders that you can handle your debts.
How long it takes: Your car loan payments will begin boosting your payment history as soon as they’re added to your credit report. However, the longer you keep making your payments on time, the better you’ll look to lenders, so this effect strengthens over time.
Diversifying your credit mix
Credit scoring models reward you for having a good balance between revolving credit accounts (like credit cards) and installment loans (like car loans). If you previously had no credit history, or if you only had credit cards, then adding a car loan to your credit profile will improve your credit mix.
Although your credit mix only has a minor effect on your credit score, adding a new type of credit to your credit file could be enough to give your score a small boost.
How long it takes: The positive effect will occur immediately, as soon as the auto loan is added to your credit report.
How car loans can initially hurt your credit score (and later help it)
As mentioned, getting a new auto loan can also have a few negative effects on your credit score, particularly right after you first receive it. However, once you’ve had the loan open for several months to a year, many of these effects will become positive.
Triggering hard inquiries
Each application you submit for a new car loan (or any other credit account) will cause a hard inquiry to appear on your credit report. Hard inquiries are records that show that a lender checked your credit history while reviewing your loan application.
Hard inquiries cause your credit score to drop by several points, so it’s best to avoid incurring too many of them in a short period of time.
How long this lasts: Hard inquiries only stay on your credit reports for 2 years, and their effect on your credit score won’t last more than 6–12 months. Realistically, this isn’t something you need to worry about unless you’re planning on applying for another large loan (such as a mortgage) in the very near future.
Reducing the average age of your credit accounts
Any time you open a new credit account, the average age of your accounts automatically drops (unless it’s your first credit account). This reduces the overall length of your credit history and negatively affects your credit score.
If you only had very old accounts, then the negative effect will be more extreme. However, if you’re getting a car with no credit history, then you may see little to no impact on your credit score.
How long this lasts: After about a year, the negative impact on your score will probably be fairly negligible. In the long term (several years), your loan will actually start positively contributing to your credit history and benefiting your score instead of harming it.
Increasing your debt
When you finance a car, you’re adding to the total amount of debt you have. Both FICO and VantageScore take into account the amount of debt you still have left to pay off on your loans. 1 2
When you first take out an auto loan, you’ll have 100% left to pay off, which may negatively affect your credit score. However, as this number declines over time, your credit score will improve.
How long this lasts: It depends on how long you take to pay off your loan (your loan’s term). Once you get close to fully repaying your loan, your balance will almost certainly help your score instead of harming it.
How long does it take a car loan to show up on your credit report?
It generally takes around 1–2 months for a new car loan (or any other new credit account) to appear on your credit report for the first time. This is because most creditors report account information to the major credit reporting agencies (Experian, Equifax, and TransUnion) just once every 30–45 days. 3
Why your auto loan isn’t on your credit report
If it’s been a couple of months and you’re still not seeing your new car loan in your credit report, there are two possible explanations:
- Your lender isn’t reporting to the credit bureaus: Lenders are under no obligation to report account information to the credit bureaus—most of them do, but they don’t have to. They might not be reporting your car loan payments at all, or alternatively, they may only be reporting to one or two of the three credit bureaus and the credit report you’re checking is from a bureau that your lender doesn’t work with.
- It’s a credit-reporting error: It’s possible that the credit bureaus have added your auto loan to someone else’s credit report instead of yours by mistake, or the information for your loan simply got lost in the shuffle somehow.
To get to the bottom of the issue, contact your lender and ask about their credit reporting policy.
If you discover that the account should be on your credit report but isn’t, then file a credit dispute with the credit bureaus to get the car loan added to your credit report. (This is assuming that the loan is in good standing; if you’ve missed payments on it, then it not appearing on your credit report is arguably a good thing.)
How long do car loans affect your credit score?
Auto loans will be factored into your credit score as long as they appear on your credit report.
There are two possible credit reporting limits for your auto loan, depending on whether:
- You missed payments on it: If you have any derogatory marks associated with your auto loan (like late payments or repossessions), all the negative marks associated with the account will stay on your credit report for up to 7 years, starting from the date of your first delinquency. 4
- It’s in good standing: If you made all your loan payments on time and paid off your debt within the agreed-upon repayment period, then your auto loan will stay on your credit report and contribute to your credit score for 10 years, starting from the date you paid off the loan. 5
Is buying a car a good way to build credit?
Financing a car can certainly help you build credit, but you should never borrow money just for the sake of raising your credit score.
Taking out loans is also one of the riskiest and most expensive ways to build credit since interest will always be growing on your unpaid balance (unless you’re one of the lucky few people who can qualify for special 0% APR auto financing). It can also be difficult to buy a car with bad credit since many lenders have a minimum credit score requirement for car loans.
There are plenty of ways to build credit for free and without the major financial commitment of an auto loan. However, if you actually need to take out a car loan and you want to increase your credit score in the process, choose a lender that reports to at least one of the main credit bureaus, and make sure to make all your car loan payments on time and in full.
A car loan won’t necessarily increase your credit score by 100 points, but with care and patience, it’ll help you establish a good payment history, improve your credit score over time, and hopefully qualify for all the best loan terms in the future.
