How Buying a Car Can Impact Your Credit Score:
Purchasing a new car is exciting, and can impact your credit score in a variety of ways. Get to know what actually goes into a credit score to best understand what effects you may see when purchasing a new vehicle.
Let’s start with the 5 things that go into a credit score, and their percentage or weight according to FICO:
- 35% is Payment History – Lenders want to know they can depend on you to pay back your loans, so whether or not you are paying your bill on time is the biggest factor. This applies to all loans ranging from a credit card to a mortgage.
- 30% is Amounts Owed – How much of your available credit are you using? Are you maxing out your credit lines? This would make lenders worry that you may not be able to pay it all back when the time comes. Purchasing a vehicle adds to the amount of credit you are using, but also the amount you have been approved for in total, so maxing out credit lines would apply more to credit cards and other lines of credit.
- 15% is Length of Credit History – The longer you have had your accounts open, the more history you have for lenders to see. Length of credit history, as with payment history, helps build up trust as you pay things off over time, and on time. Just because you don’t have a long credit history though, doesn’t mean you can’t still have a great credit score. As you can see above, other factors play heavily into your score as well, and everyone has to start somewhere when it comes to building up your credit and credit score.
- 10% is Credit Mix – It’s not necessary to have one of every type of credit line, but wisely managing and building up a variety makes a positive impact on your score. Lenders like seeing you have a variety of credit lines, and are managing them well. Variety can include credit cards through large companies, or retailer-specific credit lines, a mortgage, or an auto loan to name a few.
- 10% is New Credit – Lenders like knowing if you have opened up several accounts at once, since according to research that is a sign that it is a higher risk to lend to you. If you can space out new credit, it will be less of a negative impact on your score. Remember also the impact of making payments on time. Often your score will recover the few points it went down from opening up a new credit line and having a hard credit pull run as you continue making payments on time.
What is a hard credit pull?
Also known as a hard credit inquiry, it is done when you apply for a new line of credit. Lenders want to see your credit history to determine if you are a good candidate for a loan. They will want to see the five factors above, payment history, credit utilization, length of credit history, credit mix, and how new your credit lines are. Every establishment is different in what is required to be approved for a loan, and not all establishments require a hard credit pull to take out a loan. At Berge’s Riverview Toyota you can get pre-approved with NO effect on your credit score. Want to get a head start with pre-approval? Get pre-approved online for your auto loan, here.
How does a hard credit pull impact my credit score?
On a short-term level, hard credit pulls have a negative impact, and will stay on your credit report for two years. I know what you’re thinking: How then can you expect to apply for any loans? This is where the short and long term picture comes in. Short term you will likely see your credit score drop a few points when you apply for a loan, however, after a few months of making payments on time, the points you lost should build back up, and your credit history and length of credit history will grow. That is a very positive thing when it comes to building credit. Remember that applying for credit weighs in at 10% of your score, so as long as you aren’t applying for many loans at once, the other factors can help you maintain a great score even after your credit is pulled.
Other ways buying or financing a car can impact your credit score:
Having a vehicle and making monthly payments on it helps show a diverse credit mix on your credit score. Also note that anytime you make a payment on time, it has a positive impact on your credit score, so having a loan you are responsibly paying off helps build your credit history and overall score.