Car buyers from Panama City, Lynn Haven, Callaway, and beyond often ask at Panama City Toyota in Florida if buying a vehicle with an auto loan can help their credit score. Here’s our usual response: A loan can lower your credit score a little in the short term. But providing you make your payments regularly and on time, car financing will help build your score in the long term.
Let’s take a look at your credit score and the factors that affect it.
What Factors Affect Your Credit Score?
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When you apply for a car loan, a potential lender will access your credit report and check your FICO credit score to assess how much of a credit risk you might be. The scores range from 300 to 850. A score between 670 and 739 is considered good, with anything above being very good or exceptional. A score of 580 to 669 is below average, but you may still qualify for a loan. At the same time, a credit score below 580 is poor and shows you could be high risk.
According to FICO, five major factors influence — by varying percentages — your credit score:
- Payment history (35%).
- Accounts owed (30%).
- Length of credit history (15%).
- Credit mix (10%).
- New credit (10%).
Payment history is the most important factor because any lender will want to know that you’ve made payments for previous lines of credit. Your credit report will show any late or missed payments on past credit accounts.
Accounts owed shows what you owe, although owing a lot doesn’t necessarily mean a low credit score. Account owed is the ratio of the money you owe in relation to your available credit. For example, if you only owe $5,000 but your credit cards are maxed out and you’re overextended, you’d have a lower score than if you owed $50,000 but you’re not close to your credit limit on any account.
Length of credit history is the period you’ve had credit for. Generally, the longer your credit history, the higher your credit score will be. But even if you have a short credit history, you can still have a high credit score if the rest of your credit report is good.
Credit mix is a variety of credit types, such as mortgages, credit cards, and installment loans (including car loans). Your score will be higher if you have a healthy mix of credit, as long as you also have a good payment history.
New credit refers to newly opened credit accounts. If you open many new accounts in a short time, it indicates a risk, which could lower your credit score. In other words, you should avoid applying for too many credit accounts too quickly.
Debt Types Affect Credit
The type of debt you have can also affect your credit score. There are two main types of debt:
- Revolving credit.
- Installment loan.
Revolving credit is a credit account with ever-changing balances and payments. Credit cards are the most common type of revolving credit. Always paying off your credit cards on time and staying within your credit limit shows good financial management and will help you build a good credit score.
An installment loan is a type of debt you pay off in installments, typically by monthly payments, such as a car loan. Making full payments consistently and promptly demonstrates to lenders that you’re willing and able to manage your debts responsibly.
How A Car Loan Affects Your Credit
When you present an application for a car loan in Panama City, the dealership will usually send it to several potential lenders to try and find you the best deal available. Each lender will check your credit report, which adds a hard inquiry to your report. Generally, each new inquiry will temporarily drop your score by a few points.
However, the scoring system recognizes that even if several inquiries for an auto loan are made, you’re only going to buy one car and the lenders’ inquiries will usually be combined to count as only one. With some of the more recent credit scoring systems, car loan inquiries don’t affect your credit score at all.
Once you buy your new car and actually sign up for the loan, the new debt will be added to your credit report as an installment loan. Your credit score will likely drop a few more points as there’s no payment history linked to this loan and it’s uncertain whether you can manage the new debt.
The good news is, as you make your monthly payments on time, your credit score will start to increase. If your credit report doesn’t have another installment loan, your car loan adds to your strong credit mix. It will also add to your payment history, accounts owed, length of credit history, and new credit — all of which help your credit score.
Rebuilding Your Credit With A Car Loan
Even if you have a low credit score, you may still be eligible for a used car loan at Panama City Toyota. Our in-house finance center can work with Panama City drivers with poor credit ratings to find the best financing solution for their circumstances. We are dedicated to getting you behind the wheel of a quality pre-owned Toyota, even when your credit is below average.
When you’ve been approved for a loan and start making your monthly payments on time, you will likely see a significant increase in your credit score over the period of your car loan. That will get your credit report back on track and make it easier to obtain credit in the future. So, even if your credit score is not the best, don’t hesitate to speak to our friendly finance team to see what they can do for you.
So, there you have it. Buying a car from Panama City Toyota can help your credit, as long as you don’t miss any payments and you make your payments on time. You can even get preapproved for car financing by using our online finance application. Come visit us at West 15th Street, Panama City, Florida, to find your dream car today.
