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Does a Car Loan Help Your Credit?

The Fair Issac Corporation (FICO) builds your score based on five major factors. There are several factors that are key to answering the question:  Will a car loan help my credit?

Debt Utilization

The first factor is the debt utilization ratio aspect. This accounts for thirty percent of your credit score. The higher your balances are in comparison to credit limits, the lower your score. In the case of an auto loan, the credit limit considered is the original amount of the loan. So, when the loan is brand new, your score will drop because it will appear as if you are ”maxed” out on the account and have a high utilization ratio. Each on time payment will lower that ratio, raising your score.

Credit Mix

The second factor that will be considered is the variety of credit types used. An auto loan is an installment credit line, compared to a credit card which is a revolving line of credit. FICO weights your use of different types of credit lines and this aspect accounts for ten percent of your overall credit score.

Payment History

Lastly, whether you made your payments on time or not weighs heavily on your credit score. Making one late payment can undo a year’s worth of on time payments and lower your score by as much as 100 points. The later the payment (say 90 days late compared to less than 30 days late), the more damaging it will be.

So, to answer the original question:  yes, a car loan does help your credit, provided that you have made your payments on time. How long will it take to improve your credit?  Your score should steadily rise while you are paying off the loan, as opposed to an acute jump the day you make your final payment.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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