Does a Car Loan Build Credit?

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You might ask yourself "Does a car loan build credit?", especially if you are in the market to purchase a new vehicle. Here at Granite Hyundai in Somersworth, NH, we help people with their car-buying process, including walking them through the loan and financing procedures. You never know what type of credit hit or spike you might see following a car loan, which is why we have created this article. Stay tuned as we detail more below!

Credit Scores

Credit scores play a huge role in car loans and can determine the terms under which your car repayment falls. Many drivers who shop for Hyundais with us at Granite Hyundai depend on us to run a credit check and inform them about their possible loan options, so this is something we are more than glad to help with.

To summarize what a credit score means:
A credit score is a numerical representation of your creditworthiness, showing your ability to pay back an amount of money to a creditor (car loan, mortgage, credit card, private loan, public loan, etc.) and influencing approval rates for big and small purchases.

Common Credit Score Ranges:

• Poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very Good: 740-799
• Excellent: 800+

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How Car Loans Impact Credit

For people asking themselves, "Does a car loan build credit?" you must first understand how one impacts your credit score. Typically, when you apply for a car loan and get approved, your score drops slightly because of the new debt added to your report. However, as you pay back your car each month, this score will rise, proving to other lenders that you are good for your money and stick to your agreement.

What Influences Your Credit Score?

A credit score can be influenced by several factors, with a car loan playing a significant role, much like a mortgage, on your report. To summarize, you can expect new accounts, positive/negative payment history, the length of opened accounts, the number of open and closed accounts, credit utilization ratio, and general debt-to-income to influence your credit score.

New Credit Accounts

Getting approved for a new credit card or loan can influence your credit score, especially as time passes. The more accounts you have, as long as they are in good standing, the better your credit will be.

Payment History

Paying back your debt, whatever it is, is one of the most important parts of maintaining a healthy credit score. If you do not repay your car loan, mortgage, credit card, or loan on time, this will greatly impact your score.

Length of Credit History

Another influence on your credit score is how long you have had your accounts, usually averaged by the newest and oldest, which shows creditors how long you have been managing your debt. The longer the credit history, the higher the score.

Credit Utilization Ratio

When you see the phrase "credit utilization ratio," this means the amount of credit you have used versus the total line of credit your accounts provide you. For example, if you have five credit cards totaling a $50,000 line of credit and currently have used $25,000, this would be considered a high/at-risk credit utilization ratio (>50%). You want to keep your credit utilization under 30%, ideally.

How a Car Loan Can Improve Your Credit

A car loan can improve your credit, even if, at first, it dings your total score. Below, we will break this down for you, addressing the question: does a car loan build credit?

Establishing a Payment History

One of the ways a car loan improves credit is by showing that over time, you can make on-time payments back to a large purchase. It builds trust with future and current lenders, which could mean lower APR, better terms, and zero down payments.

Diversifying Credit Mix

One of the easiest ways to raise credit is to diversify your credit mix. This could include a car loan, home loan, private or public loan, credit card, business loan, or anything else that proves you have money circulating.

Potential Risks of Car Loans on Your Credit

The risks of a car loan on your credit would be a temporary lowering of your score (new accounts often drop you a few points), as well as if you miss a payment or regularly cannot make your car payment.

Late Payments

Late payments are one of the most significant dings to credit and often happen with car loans. Here at Granite Hyundai, we can help you find a car that fits your budget and enroll you in auto-pay for your vehicle's monthly loan installment.

Overextending Credit

As many people come to realize, more credit is not always a good thing. Overextending credit can mean you spend more than you can repay, open too many credit cards and end up in major debt, or take on major loans for vehicles or properties that are not sustainable.

Strategies to Maximize Credit Benefits with a Car Loan

To leave you with a few tips on maximizing your credit with a car loan, we have some ideas that should help build, not drop, your overall score.

Timely Payments

Make your car payments on time each month, with auto-pay being the best way to ensure this happens. A healthy repayment history is one of the most important aspects of credit, so try to stay on top of this.

Managing Credit Utilization

In addition to on-time car loan payments, we suggest keeping your credit utilization under 30%, which could mean cutting back on non-essential spending or applying for more lines of credit (and not using them).
Less spending and more credit = the key to success.

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Use Granite Hyundai's Credit Repair Program

Now that you know the answer to "Does a car loan build credit?", Granite Hyundai can also help with credit repair before, during, and following a car loan, which we do by checking your score, reporting issues to official creditors, and reporting your on-time payments as they come in. Our team of experts can also help those with low or little to no credit history get approved for a car loan through our dealership, all to boost your future potential for securing loans and accounts.

Swing by our showroom in Somersworth, NH, today to speak with us about credit repair, and a friendly staff member will direct you to the appropriate department. Drive safe!