Will Financing a Car Lower My Credit Score?

Financing a new or used car usually requires a good credit score, according to the Lease Guide automotive website, although borrowers with some past problems can sometimes get high-interest loans. The vehicle loan itself affects a consumer's score once it is finalized. It has a mix of positive and negative influences depending on various factors.

Definition

• Car financing means getting a loan to purchase a new or used vehicle. Cars are generally expensive, so consumers often borrow money instead of paying the full amount up front. Some people get their financing through the dealership, but Lease Guide explains that dealers themselves do not provide loans. They work with banks and finance companies, which actually provide the funds. Car buyers can also arrange their own financing through banks, credit unions and other lenders.

Negative Effects

• Car loans add a lot of debt to a person's credit records, especially when purchasing a new vehicle. FICO, the main credit score provider, explains that it considers outstanding debt in its calculations. If that person has high balances on other loans, credit cards and accounts, the car loan brings the credit score down. Skipping any payments or sending them in late also hurts the score.

Benefits

• Borrowers with good credit records can raise their credit scores with car loans. The payments show up on the credit reports, and Edmunds automotive site editor Warren Clarke advises that payment history accounts for more than one-third of the score. Prompt remittance on the car loan, along with any other accounts, is very favorable in a person's credit file.

Considerations

• The Experian, Equifax and TransUnion credit bureaus do not always report accurate data. A responsibly handled car loan could be unjustly hurting a person's credit score because the bureaus are reporting timely payments as late. The Federal Trade Commission explains that federal law entitles everyone to free yearly credit reports through annualcreditreport.com. This lets borrowers check their loan status and dispute errors. The bureaus or obligated by the Fair Credit Reporting Act to investigate such matters and correct or remove mistakes.

Warning

• Consumers who overextend themselves with high car loans can destroy their credit ratings if their vehicles are repossessed. The FTC says most vehicle financing contracts give lenders the right to take back the car as soon as the loan goes into default. This means one late or missed payment is grounds for vehicle reclamation. A repossession seriously hurts a credit score and stays in a person's credit bureau files for seven years.