Credit Scores and Car Loans: How Do They Work?
Auto buyers are constantly worrying about the impact of car loan on their credit score. Like many other questions about auto loans, the answer lies in your choices. Credit scores are indeed affected by automotive financing, and depending on how diligent you are with making payments, you can either improve your score or ruin it.
How Do Car Loan Payments Affect Your Credit Score?
Making timely repayments on your car loan is a great way to improve your credit score. But, missing the payments will have a negative impact on your score. Do you have poor credit? If so, then repaying your auto loan may be the best way to repair your credit. People with good credit scores are also benefited since timely repayment will solidify and improve any pre-existing good credit. You will see these benefits as long as you have enough resources to fund your loan repayment. You must remember that the terms of every car loan are different. Due to this, it is difficult to predict the exact points by which your credit scores may rise.
What About Paying Off Early?
Are you considering to pay off your loan early and save some interest amount? Well, remember to check your loan agreement and ensure that there are no penalties for early repayment. Sometimes, it is worth to have car loans longer and make timely repayments. They might just improve your credit score. Credit lines that are presently open and being managed properly help you build a strong credit history.
Once you have cleared the entire loan amount, your updated credit report will show “paid in full.” You may have to wait for one or two billing cycles for this change to be reflected. Lenders generally have their statuses updated at the end of a billing cycle, so you may need to wait for a month or two for updated credit scores.
Paying off your car loan has a significant impact on your credit history. Sometimes, you may notice a slight drop in the scores after repayment. This drop is generally for a small duration and can be recovered after your credit history is stabilized.
Once you have made timely repayments, your loan will be counted as a positive history for the next 10 years from the date it was repaid. Positive credit history always stays longer than negative ones. So, paying off a car loan will help you improve your credit history.
What About Skipping Payments?
On the flip side, if you think that you are unable to keep up on the repayments, then it could be worthwhile to ask your lender about a loan extension. This will give you a brief financial relief. Skipping payments for over 60 days will cause a huge drop in your credit score. The extension can only be given if your late payment is within a reasonable duration. This way, your lender will not flag your late payment to the credit bureau.
Nevertheless, you must remember to keep a tab on your credit scores. After all, nationwide credit reporting bureaus entitle individuals to access one free report every year without damage to your credit score, and companies like Credit Karma allow you to check your credit as often as you like for free and without an impact on your score.
Paying off a car loan is a make or break situation for your credit scores. While repayment options are many, you will need to adhere to the repayment terms to successfully repay the loan. Not repaying your loan will have a very bad impact on your credit score.