Does a Car Loan Help Build Credit?

Does a Car Loan Help Build Credit?

Steady, timely payments are the key to building credit with a car loan. Merely opening a car loan typically won't have a big effect on your credit scores, but it could have some minor impacts:

• Opening a car loan might cause a small, temporary decline in score in response to the hard inquiries made when you applied for the loan.
• On the other hand, accepting a car loan could give your credit scores a small boost, by improving what's known as your credit mix. Lenders value borrowers' ability to manage both installment loans (such as car loans) and revolving credit (such as credit cards), and credit mix is a credit scoring factor that encapsulates that skill. Credit mix accounts for about 10% of your credit score, so your FICO^® Score^☉ and VantageScore^® credit scores could increase a bit, especially if your car loan is the only open installment loan on your credit report.

Learn more: What Affects Your Credit Scores?

How to Use a Car Loan to Build Credit

The key to building credit with an auto loan, or any other installment loan, is to prove you can and will make your payments on time every month, as spelled out in your loan agreement.

Payment history is the largest single factor that influences credit scores, responsible for about 35% of your FICO^® Score. Regular on-time payments play a big role in promoting credit score improvement, while just one payment that's overdue by 30 days or more (also known as a delinquency) can do significant harm to your scores.

By doing whatever it takes to get your payment in by your monthly due date, you'll tend to see steady improvement in your credit scores.

If remembering to make your payments on time is a concern, here are some tips for making sure you're not late:

• Take advantage of technology. There's a good chance your lender's website or app can help you stay on top of your payment deadlines. Most lenders enable you to set up text or email alerts to remind you when payments are due. Many creditors also provide automatic payment options that can transfer funds on the appointed day each month without any additional action on your part. If you go the autopay route, just take care that there are sufficient funds in your checking account so you avoid accidental overdrafts.
• Be proactive if payments are in doubt. If you think you might not be able to afford a payment, reach out to your lender immediately—ideally before you miss a deadline—to discuss alternatives. Depending on the situation, you may be able to defer a payment or arrange a temporary forbearance period, during which your payments are temporarily reduced or suspended. Note that in a deferment or forbearance arrangement, you'll be expected to make all payments in full, usually with additional interest charges.

Learn more: How Does Buying a Car Affect Your Credit?

More Ways to Build Credit

Making consistent on-time payments on a car loan is just one proven tactic for building up your credit scores. Combining it with these other tried-and-true approaches may help increase your scores even faster:

• Keep credit balances low. As mentioned above, you can enhance your credit mix by maintaining one or more credit cards or other revolving accounts along with your car loan. Even more important for your credit scores, however, is prudent management of utilization rates on those revolving accounts—the percentage of their credit limit compared to their outstanding balances. Utilization rate is responsible for about 30% of your FICO^® Score, and utilization greater than about 30% can lower your credit scores. Folks with the highest FICO^® Scores tend to keep utilization below 10%.
• Become an authorized user. If you don't qualify for a credit card of your own, becoming an authorized user on a friend's or family member's card could help. As an authorized user, you'll be added to an existing account and be given your own card to use, and the card's payment history will be shared with you, appearing on your credit report and influencing your credit scores. As long as the account's balances are kept reasonable and payments are made on time, that can help your credit profile.
• Use Experian Boost^®ø to add utility bills to your Experian credit report. A long history of paying bills on time for non-debt expenses such as utilities, cellphones or rent may show that you're financially reliable—but those payments don't automatically help you build your credit score. You can add many of those bills to your Experian credit report by linking Experian Boost to your checking account and letting it track their payments. Late payments will be ignored, but on-time payments can instantly benefit FICO^® Scores powered by Experian.
• Get professional advice. If debt is a problem for you, or if you just want guidance on managing your debt, a certified nonprofit credit counselor could be a great resource. They can offer helpful tips and, if necessary, even help negotiate with your creditors on your behalf.

Learn more: How to Improve Your Credit Score

The Bottom Line

An affordable car loan is a great way to finance the vehicle you need, and making regular car payments builds a positive payment history that can put you on the road to a steady credit score improvement. Along the way, you can track your progress by checking your FICO^® Score for free from Experian.