Does Financing a Car Build Credit?

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Buying a car is one of the biggest purchases many people make — and for most, it involves taking out an auto loan. But beyond getting the keys to your new ride, you might be wondering: Does financing a car build credit?

The short answer: Yes — it can, if managed responsibly. A car loan can be a powerful tool for boosting your credit score.

Here’s how it works, what to watch out for and what to do if you’re just looking to build credit without buying a car.

Can Financing a Car Build Credit?

The average used car or truck now costs $18,577 in the U.S., according to Federal Reserve data from March 2025. That means, for many Americans buying a vehicle, auto loans are a necessity. 

An auto loan can help your credit if you make your monthly payments on time and the lender reports them to major credit bureaus, including Experian, Equifax and TransUnion. Here’s how it benefits your credit profile:

• Opening and managing a loan increases the number of active accounts, which can improve your score over time.
• On-time payments help build a strong payment history.
• A car loan adds to your credit mix, showing lenders you can handle different types of credit.

Important: “Buy here, pay here” dealerships typically only report to the credit bureaus if you’re late or miss a payment, meaning paying on time won’t improve your score. If you finance through one of these dealerships, make sure to read the auto loan contract thoroughly and request in writing their promise to report your payments to the credit bureaus.

How Car Payments Impact Your Credit Score

If you’re wondering, “Does financing a car build credit?” it’s important to know the different factors that affect your score:

Payment History (35% of Credit Score)

Making up 35% of your FICO score, payment history is the most heavily weighted aspect of your credit score.

By paying your loan on time each month, you’re showing future lenders that you can reliably manage debt, which can increase your score over time.

Missed or late payments, on the other hand, can significantly hurt your credit. Just one missed payment can remain on your report for up to seven years. 

So, do car payments build credit? Absolutely! Just make sure to pay on time every month. If you have trouble with this, try setting up auto-pay or reminders in your calendar to stay on track. 

Credit Mix (10% of Credit Score)

Your credit mix is the various types of credit that you use, including revolving credit (like credit cards) and installment credit (like loans). Usually, it’s good to have a mixture of loans and credit cards because it shows lenders you can manage different types of credit. 

An auto loan is considered installment credit since it has fixed monthly payments. If you only have revolving accounts (like credit cards), adding a car loan could improve your credit mix and increase your score. 

Credit Utilization and Loan Balances (30% of Credit Score)

Credit utilization is another heavily weighted factor in your credit score. This is the amount of revolving credit you’re using compared to how much is available to you.

Typically, you’ll want to keep your credit utilization below 30%, but it should preferably stay under 10%.

When considering, “Does financing a car build credit?” you don’t have to worry about it affecting your credit utilization. Since an auto loan is an installment credit, not a revolving credit, it won’t count against you here.

Credit Inquiries and New Credit (10% of Credit Score)

When you apply for financing, the lender pulls your credit history to assess your risk level and decide the best auto loan rates they can offer you. This results in a hard inquiry on your report, which might lower your credit score by a few points, but it usually doesn’t last long.

If you apply for multiple loans within a short time frame (usually 14 to 45 days), many credit score models will count them as a single inquiry. 

While opening a new account could lower your average credit age, the effect typically diminishes over time as the account ages and stays in good standing. 

Will Financing a Car Hurt Your Credit?

When you finance a car, there might be a small drop in your credit score from the hard inquiry and new account.

However, the real risk is from missed or late payments, which could hurt your payment history and damage your credit long term. 

Missed payments can also lead to repossession, meaning the lender takes the car from you. Your credit report will show the repossession for seven years, which could make it more challenging to borrow money in the future.

If you already have a lot of debt, you shouldn’t take out an auto loan that would stretch your budget too far. This could lead to missed payments on your car or other bills, which could ultimately hurt your credit.

Alternatives to Financing a Car to Build Credit

If you want to know, “Will financing a car build credit in my situation?” but you don’t really need to buy a vehicle, consider other ways to improve your score without an auto loan:

• Use a secured credit card: These cards function like regular credit cards, but they require a deposit when you open the account to secure it. They can help you build credit if you don’t qualify for a regular credit card, and if you make your payments on time and in full, you could get your deposit back later.

• Become an authorized user: You might improve your score by asking a family member or friend with a good credit history to add you as an authorized user on one of their cards.

• Take out a credit-builder loan: With a credit-builder loan, instead of receiving the loan balance upfront, the lender holds on to it while you make payments toward the amount. The lender reports your payments to major credit bureaus, and at the end of the term, you receive the loan balance in a lump sum. 

Final Take to GO

So, does financing a car build credit? It can, depending on how you manage the loan. Here are some important things to remember:

• Your credit score may drop a bit after you apply for the loan.
• Always make your payments on time, or the loan could actually hurt your credit.
• If you don’t need a car, trying other avenues to build credit may be best, like a credit-builder loan or a secured credit card. 

While taking out a car loan won’t automatically increase your score, on-time payments could prove your creditworthiness to future lenders.

The information is accurate as of April 15, 2025.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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