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Car Loans and Your Credit

Does a car loan inquiry hurt your credit? Does paying off a car loan help your credit? Our experts answer common questions about car loans and credit.

Car Loans and Your Credit

Getting a new car is exciting, but the idea of a car loan can be a little overwhelming. Many people wonder how applying for and taking on a car loan will affect their credit. Here, we break it all down for you so that you can enjoy your new ride without any stress.

Applying for a Car Loan 

So, does applying for an auto loan hurt your credit? Technically the answer is yes — for the short term — but it helps in the long run.  Each time you apply for a car loan, what’s called a “hard inquiry” is added to your credit report. A hard inquiry will temporarily knock a few points off your credit score. But don’t worry, the positive impact that making loan payments on time will have on your credit, far outweighs the negative. Just be sure to keep your search for a loan brief, as inquiries that occur within a 30 day time period are usually only counted as one inquiry in total.    

 Car Loan Payments and Your Credit

As we mentioned before, making payments in full and on time for the full term of your auto loan is a great way to build your credit history and increase your credit score. Because car loans are considered “installment accounts,” which means that they have the same payment every month for a set number of months, having one can improve your credit mix if you currently only have credit card accounts. Make sure to set up automatic payments so that you don’t risk forgetting to make a payment and hurting your credit. Check your credit report regularly with one of the three major credit bureaus — Equifax, TransUnion or Experian — to make sure that payments are reported accurately.

Paying Off Your Car Loan

You might like the idea of paying off your auto loan early so that you have one less monthly expense, but does paying off a car loan help your credit? Well, the answer is: it depends. When you pay off your loan and close your account, this can have a negative impact on the age of your accounts, as well as your credit mix, so your score could potentially go down. If your interest rate and credit utilization are low, the loan might be worth keeping. On the other hand, if your interest rate is high and you have other installment loans open, such as a mortgage, it might be a good idea to pay off the loan. 

If you are smart about shopping around and make your payments on time, an auto loan can help you build your credit history and increase your credit score.    

Interested in getting a car loan? Apply with TDECU today.


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