How Does Buying a Car Affect Your Credit?

signing sales contract for car at dealership
kzenon / iStock.com

If you’re considering buying a vehicle in 2023, get ready to dig deep. According to the most recent data from Kelley Blue Book, the average new car now costs $48,681 — even the average used vehicle will run you north of $27,000.

Those numbers mean different things to different people, but one thing is certain: Unless you plan to buy the car with cash, financing a set of wheels will impact your credit score.

Whether that impact hurts or helps depends on you.

Before you start calling dealerships, take an honest inventory of your budget in light of those average prices and make sure your credit is in tip-top shape going in. As you’re about to learn, the only auto loan worth signing is the one you can afford.

Don’t Worry About a Hard Pull Unless You Just Had One

Whether you shop for preapproval beforehand or finance your car through the dealership, you’ll eventually trigger a hard inquiry — several if the dealer searches for the best rate on your behalf. Don’t worry. A hard pull can knock your score down a few points, but only temporarily.

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The exception is if you’ve recently applied for credit or a loan. Back-to-back hard pulls can cause damage that’s more severe or longer lasting because pursuing new credit too frequently raises red flags to lenders.

If your credit is otherwise in good shape, you’ll be fine if you don’t apply for a new card or loan within six months of when you plan to go car shopping.

Buying a Car Will Improve Your Score — If You Can Swing the Payments

Not only won’t purchasing a car hurt your score, but financing a vehicle will actually strengthen your credit in the long run — but only if it’s a loan you can afford. After the minor initial hit you might take from a hard pull, your score will quickly rebound and then start to increase.

That’s because a new loan puts another account on your credit report, and every account in good standing increases your creditworthiness. It also will help by adding to your mix of accounts; lenders like to see a blend of both revolving credit (e.g., credit cards) and installment credit (auto loans). Each on-time payment makes you more attractive to prospective lenders while steadily reducing your overall debt.

All of these benefits, however, are contingent upon your ability to keep up with your payments.

If You Get Into Trouble, So Too Will Your Credit Score

For all of the good that can come from a healthy car loan that you keep in good standing, just one slip can send the whole thing — and your credit — crashing down.

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According to Lending Tree, a single missed car payment can tank your score by as much as 180 points — those with higher scores will take the biggest hits.

From there, things only get worse — and fast. Once you’re 60 days late, your score will fall even further and you’ll become toxic to lenders who will deny you all but the very worst loans with the highest interest rates. Worst of all, the blemish will follow you for seven years until it falls off your report.

An Unaffordable Auto Loan Is Credit Kryptonite

After 60 days, you’ll be in default and your lender will do whatever possible to recoup its losses. That means sending your account to collections, repossessing your vehicle and possibly suing you for repayment. None of those scenarios are good for your credit or your financial life, in general.

According to Experian, a repossession or court judgment can hammer the final nail into your credit’s coffin, rendering you persona non grata among lenders for the better part of a decade.

None of those scenarios are too far-fetched. In November 2022, CNBC reported that auto loan delinquencies had risen to their highest level in a decade.

Alternatively, you might wind up robbing Peter to pay Paul — neglecting your other, less-consequential payments to avoid defaulting on your car loan. Either way, the result is financial turmoil.

In the end, buying a car doesn’t hurt or help your credit in and of itself. Whether you emerge from the loan with your score in better or worse shape than you started depends entirely on your ability to uphold your end of the agreement, so shop wisely.

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